Does Serabi Gold (LON:SRB) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Serabi Gold plc (LON:SRB) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Serabi Gold

What Is Serabi Gold's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Serabi Gold had US$1.95m of debt in September 2020, down from US$6.86m, one year before. However, it does have US$11.0m in cash offsetting this, leading to net cash of US$9.02m.

How Healthy Is Serabi Gold's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Serabi Gold had liabilities of US$16.2m due within 12 months and liabilities of US$1.86m due beyond that. Offsetting these obligations, it had cash of US$11.0m as well as receivables valued at US$2.08m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$5.07m.

Since publicly traded Serabi Gold shares are worth a total of US$68.9m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Serabi Gold boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Serabi Gold grew its EBIT by 227% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Serabi Gold's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Serabi Gold has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent two years, Serabi Gold recorded free cash flow worth 64% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

We could understand if investors are concerned about Serabi Gold's liabilities, but we can be reassured by the fact it has has net cash of US$9.02m. And we liked the look of last year's 227% year-on-year EBIT growth. So is Serabi Gold's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Serabi Gold , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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