Is Sigma Lithium (NASDAQ:SGML) A Risky Investment?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Sigma Lithium Corporation (NASDAQ:SGML) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Sigma Lithium

How Much Debt Does Sigma Lithium Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 Sigma Lithium had CA$135.2m of debt, an increase on none, over one year. However, it does have CA$92.9m in cash offsetting this, leading to net debt of about CA$42.3m.

How Healthy Is Sigma Lithium's Balance Sheet?

The latest balance sheet data shows that Sigma Lithium had liabilities of CA$53.1m due within a year, and liabilities of CA$133.4m falling due after that. On the other hand, it had cash of CA$92.9m and CA$914.0k worth of receivables due within a year. So its liabilities total CA$92.8m more than the combination of its cash and short-term receivables.

Having regard to Sigma Lithium's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CA$4.88b company is struggling for cash, we still think it's worth monitoring its balance sheet. But either way, Sigma Lithium has virtually no net debt, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Sigma Lithium can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Since Sigma Lithium has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.

Caveat Emptor

Over the last twelve months Sigma Lithium produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CA$148m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CA$182m in negative free cash flow over the last twelve months. So to be blunt we think it is 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 instance, we've identified 3 warning signs for Sigma Lithium (1 can't be ignored) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.