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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Serabi Gold plc (LON:SRB) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Serabi Gold

What Is Serabi Gold's Net Debt?

As you can see below, at the end of September 2024, Serabi Gold had US$6.02m of debt, up from US$5.42m a year ago. Click the image for more detail. But it also has US$20.0m in cash to offset that, meaning it has US$14.0m net cash.

How Strong Is Serabi Gold's Balance Sheet?

We can see from the most recent balance sheet that Serabi Gold had liabilities of US$17.0m falling due within a year, and liabilities of US$6.14m due beyond that. Offsetting this, it had US$20.0m in cash and US$2.10m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$997.9k.

Having regard to Serabi Gold's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$154.0m company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Serabi Gold boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Serabi Gold grew its EBIT by 605% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Looking at the most recent three years, Serabi Gold recorded free cash flow of 35% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Serabi Gold has US$14.0m in net cash. And we liked the look of last year's 605% year-on-year EBIT growth. So we don't think Serabi Gold's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Serabi Gold has 1 warning sign we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.