Does Sigma Lithium (NASDAQ:SGML) Have A Healthy Balance Sheet?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Sigma Lithium Corporation (NASDAQ:SGML) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Sigma Lithium

What Is Sigma Lithium's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Sigma Lithium had CA$170.9m of debt, an increase on none, over one year. On the flip side, it has CA$64.4m in cash leading to net debt of about CA$106.5m.

How Healthy Is Sigma Lithium's Balance Sheet?

We can see from the most recent balance sheet that Sigma Lithium had liabilities of CA$122.4m falling due within a year, and liabilities of CA$150.6m due beyond that. Offsetting this, it had CA$64.4m in cash and CA$47.4m in receivables that were due within 12 months. So it has liabilities totalling CA$161.2m more than its cash and near-term receivables, combined.

Given Sigma Lithium has a market capitalization of CA$2.26b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Sigma Lithium's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

While it hasn't made a profit, at least Sigma Lithium booked its first revenue as a publicly listed company, in the last twelve months.

Caveat Emptor

Importantly, Sigma Lithium had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CA$22m. 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 CA$100m of cash over the last year. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 3 warning signs we've spotted with Sigma Lithium .

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.