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.' 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 First Graphene Limited (ASX:FGR) does have debt on its balance sheet. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.
What Is First Graphene's Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2021 First Graphene had AU$7.43m of debt, an increase on none, over one year. But it also has AU$8.43m in cash to offset that, meaning it has AU$998.7k net cash.
A Look At First Graphene's Liabilities
Zooming in on the latest balance sheet data, we can see that First Graphene had liabilities of AU$8.18m due within 12 months and no liabilities due beyond that. Offsetting this, it had AU$8.43m in cash and AU$299.1k in receivables that were due within 12 months. So it can boast AU$551.6k more liquid assets than total liabilities.
Having regard to First Graphene's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the AU$96.9m company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that First Graphene 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 First Graphene will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Given it has no significant operating revenue at the moment, shareholders will be hoping First Graphene can make progress and gain better traction for the business, before it runs low on cash.
So How Risky Is First Graphene?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year First Graphene had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of AU$7.8m and booked a AU$6.7m accounting loss. Given it only has net cash of AU$998.7k, the company may need to raise more capital if it doesn't reach break-even soon. First Graphene's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that First Graphene is showing 6 warning signs in our investment analysis , and 3 of those are a bit concerning...
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.