Yahoo Finance Is Graphite One (CVE:GPH) Using Too Much Debt?
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. As with many other companies Graphite One Inc. (CVE:GPH) makes use of debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Graphite One
What Is Graphite One's Debt?
As you can see below, at the end of June 2021, Graphite One had US$6.00m of debt, up from US$5.21m a year ago. Click the image for more detail. But on the other hand it also has US$8.79m in cash, leading to a US$2.80m net cash position.
A Look At Graphite One's Liabilities
The latest balance sheet data shows that Graphite One had liabilities of US$1.03m due within a year, and liabilities of US$6.07m falling due after that. On the other hand, it had cash of US$8.79m and US$10.0k worth of receivables due within a year. So it actually has US$1.70m more liquid assets than total liabilities.
This surplus suggests that Graphite One has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Graphite One has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Graphite One's earnings that will influence how the balance sheet holds up in the future. 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 Graphite One finds some valuable resources, before it runs out of money.
So How Risky Is Graphite One?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Graphite One had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$4.7m and booked a US$4.1m accounting loss. With only US$2.80m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 5 warning signs we've spotted with Graphite One (including 3 which are a bit concerning) .
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. 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.
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