Yahoo Finance Is Lotus Resources (ASX:LOT) Using Debt Sensibly?
Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Lotus Resources Limited (ASX:LOT) makes use of debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for Lotus Resources
How Much Debt Does Lotus Resources Carry?
You can click the graphic below for the historical numbers, but it shows that as of June 2021 Lotus Resources had AU$7.01m of debt, an increase on none, over one year. However, it does have AU$28.3m in cash offsetting this, leading to net cash of AU$21.3m.
A Look At Lotus Resources' Liabilities
We can see from the most recent balance sheet that Lotus Resources had liabilities of AU$3.31m falling due within a year, and liabilities of AU$63.2m due beyond that. Offsetting these obligations, it had cash of AU$28.3m as well as receivables valued at AU$240.8k due within 12 months. So it has liabilities totalling AU$38.0m more than its cash and near-term receivables, combined.
Since publicly traded Lotus Resources shares are worth a total of AU$291.3m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Lotus Resources boasts net cash, 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 it is future earnings, more than anything, that will determine Lotus 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.
Given its lack of meaningful operating revenue, investors are probably hoping that Lotus Resources finds some valuable resources, before it runs out of money.
So How Risky Is Lotus Resources?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Lotus Resources had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through AU$7.8m of cash and made a loss of AU$5.0m. However, it has net cash of AU$21.3m, so it has a bit of time before it will need more capital. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Lotus Resources is showing 4 warning signs in our investment analysis , and 2 of those are significant...
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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