Is Serabi Gold (LON:SRB) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Serabi Gold

What Is Serabi Gold's Debt?

You can click the graphic below for the historical numbers, but it shows that Serabi Gold had US$5.69m of debt in March 2024, down from US$11.4m, one year before. However, its balance sheet shows it holds US$11.1m in cash, so it actually has US$5.37m net cash.

How Strong Is Serabi Gold's Balance Sheet?

According to the last reported balance sheet, Serabi Gold had liabilities of US$13.9m due within 12 months, and liabilities of US$6.87m due beyond 12 months. On the other hand, it had cash of US$11.1m and US$4.02m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$5.69m.

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. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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 105% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Serabi Gold can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Serabi Gold may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Considering the last three years, Serabi Gold actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

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$5.37m. And it impressed us with its EBIT growth of 105% over the last year. So we don't have any problem with Serabi Gold's use of debt. 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. For example, we've discovered 1 warning sign for Serabi Gold that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.