Kavango Resources (LON:KAV) Is Carrying A Fair Bit Of Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 note that Kavango Resources Plc (LON:KAV) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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When Is Debt A Problem?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Kavango Resources's Debt?

The image below, which you can click on for greater detail, shows that at December 2024 Kavango Resources had debt of US$4.76m, up from none in one year. However, because it has a cash reserve of US$1.52m, its net debt is less, at about US$3.24m.

How Healthy Is Kavango Resources' Balance Sheet?

According to the balance sheet data, Kavango Resources had liabilities of US$5.48m due within 12 months, but no longer term liabilities. Offsetting these obligations, it had cash of US$1.52m as well as receivables valued at US$2.37m due within 12 months. So it has liabilities totalling US$1.58m more than its cash and near-term receivables, combined.

Of course, Kavango Resources has a market capitalization of US$31.7m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Kavango Resources's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

View our latest analysis for Kavango Resources

Given its lack of meaningful operating revenue, investors are probably hoping that Kavango Resources finds some valuable resources, before it runs out of money.

Caveat Emptor

Over the last twelve months Kavango Resources produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable US$8.6m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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$9.5m of cash over the last year. So suffice it to say we consider the stock very risky. 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 Kavango Resources has 5 warning signs (and 3 which are a bit unpleasant) we think you should know about.

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.