Ferro-Alloy Resources (LON:FAR) Is Carrying A Fair Bit Of Debt

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. We can see that Ferro-Alloy Resources Limited (LON:FAR) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Ferro-Alloy Resources

What Is Ferro-Alloy Resources's Net Debt?

As you can see below, at the end of December 2023, Ferro-Alloy Resources had US$7.39m of debt, up from US$1.11m a year ago. Click the image for more detail. However, because it has a cash reserve of US$1.95m, its net debt is less, at about US$5.44m.

How Healthy Is Ferro-Alloy Resources' Balance Sheet?

We can see from the most recent balance sheet that Ferro-Alloy Resources had liabilities of US$2.38m falling due within a year, and liabilities of US$7.42m due beyond that. On the other hand, it had cash of US$1.95m and US$1.32m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$6.53m.

Since publicly traded Ferro-Alloy Resources shares are worth a total of US$43.0m, 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Ferro-Alloy Resources 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.

In the last year Ferro-Alloy Resources had a loss before interest and tax, and actually shrunk its revenue by 8.9%, to US$5.7m. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Ferro-Alloy Resources produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping US$5.0m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$9.0m of cash over the last year. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 5 warning signs for Ferro-Alloy Resources (2 are significant) 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.