Is Ferro-Alloy Resources (LON:FAR) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that Ferro-Alloy Resources Limited (LON:FAR) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Ferro-Alloy Resources

How Much Debt Does Ferro-Alloy Resources Carry?

As you can see below, at the end of June 2024, Ferro-Alloy Resources had US$12.4m of debt, up from none a year ago. Click the image for more detail. However, it does have US$2.53m in cash offsetting this, leading to net debt of about US$9.87m.

A Look At Ferro-Alloy Resources' Liabilities

We can see from the most recent balance sheet that Ferro-Alloy Resources had liabilities of US$3.87m falling due within a year, and liabilities of US$12.4m due beyond that. Offsetting this, it had US$2.53m in cash and US$2.15m in receivables that were due within 12 months. So its liabilities total US$11.6m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Ferro-Alloy Resources is worth US$35.2m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Ferro-Alloy Resources'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.

Over 12 months, Ferro-Alloy Resources made a loss at the EBIT level, and saw its revenue drop to US$4.6m, which is a fall of 20%. That's not what we would hope to see.

Caveat Emptor

While Ferro-Alloy Resources's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping US$6.7m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$9.5m of cash over the last year. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 5 warning signs we've spotted with Ferro-Alloy Resources (including 2 which shouldn't be ignored) .

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.