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Is Dateline Resources (ASX:DTR) Using Debt In A Risky Way?

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. We note that Dateline Resources Limited (ASX:DTR) 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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

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View our latest analysis for Dateline Resources

What Is Dateline Resources's Net Debt?

The image below, which you can click on for greater detail, shows that Dateline Resources had debt of AU$2.23m at the end of June 2019, a reduction from AU$5.05m over a year. However, it does have AU$4.82m in cash offsetting this, leading to net cash of AU$2.59m.

ASX:DTR Historical Debt, November 18th 2019
ASX:DTR Historical Debt, November 18th 2019

How Strong Is Dateline Resources's Balance Sheet?

According to the last reported balance sheet, Dateline Resources had liabilities of AU$2.57m due within 12 months, and liabilities of AU$5.09m due beyond 12 months. Offsetting these obligations, it had cash of AU$4.82m as well as receivables valued at AU$208.6k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$2.63m.

Of course, Dateline Resources has a market capitalization of AU$20.3m, 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, Dateline Resources also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Dateline Resources'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 Dateline Resources finds some valuable resources, before it runs out of money.

So How Risky Is Dateline Resources?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Dateline Resources had negative earnings before interest and tax (EBIT), over the last year. Indeed, in that time it burnt through AU$5.5m of cash and made a loss of AU$3.2m. With only AU$2.59m on the balance sheet, it would appear that its going to need to raise capital again soon. Dateline Resources'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. For riskier companies like Dateline Resources I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.