Yahoo Finance Is South Star Battery Metals (CVE:STS) A Risky Investment?
The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies South Star Battery Metals Corp. (CVE:STS) makes use of debt. But the more important question is: how much risk is that debt creating?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for South Star Battery Metals
How Much Debt Does South Star Battery Metals Carry?
You can click the graphic below for the historical numbers, but it shows that as of June 2022 South Star Battery Metals had CA$2.58m of debt, an increase on none, over one year. But on the other hand it also has CA$5.22m in cash, leading to a CA$2.65m net cash position.
How Healthy Is South Star Battery Metals' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that South Star Battery Metals had liabilities of CA$3.65m due within 12 months and liabilities of CA$484.2k due beyond that. Offsetting this, it had CA$5.22m in cash and CA$32.5k in receivables that were due within 12 months. So it actually has CA$1.12m more liquid assets than total liabilities.
This short term liquidity is a sign that South Star Battery Metals could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that South Star Battery Metals has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since South Star Battery Metals will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Given its lack of meaningful operating revenue, investors are probably hoping that South Star Battery Metals finds some valuable resources, before it runs out of money.
So How Risky Is South Star Battery Metals?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months South Star Battery Metals lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CA$3.1m of cash and made a loss of CA$3.3m. Given it only has net cash of CA$2.65m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for South Star Battery Metals 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here
