Yahoo Finance Does Karora Resources (TSE:KRR) 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 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 Karora Resources Inc. (TSE:KRR) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Karora Resources
How Much Debt Does Karora Resources Carry?
The image below, which you can click on for greater detail, shows that at September 2020 Karora Resources had debt of CA$38.9m, up from CA$34.2m in one year. However, its balance sheet shows it holds CA$69.7m in cash, so it actually has CA$30.7m net cash.
A Look At Karora Resources' Liabilities
According to the last reported balance sheet, Karora Resources had liabilities of CA$48.2m due within 12 months, and liabilities of CA$110.5m due beyond 12 months. On the other hand, it had cash of CA$69.7m and CA$2.94m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$86.0m.
Of course, Karora Resources has a market capitalization of CA$530.6m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Karora Resources also has more cash than debt, so we're pretty confident it can manage its debt safely.
Better yet, Karora Resources grew its EBIT by 172% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Karora Resources'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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Karora Resources may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last two years, Karora Resources saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.
Summing up
While Karora Resources does have more liabilities than liquid assets, it also has net cash of CA$30.7m. And it impressed us with its EBIT growth of 172% over the last year. So we don't have any problem with Karora Resources's use of debt. 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. Take risks, for example - Karora Resources has 3 warning signs (and 1 which is a bit concerning) we think you should know about.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
This article by Simply Wall St is general in nature. 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.
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