Yahoo Finance Health Check: How Prudently Does Mayur Resources (ASX:MRL) Use Debt?
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.' 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. Importantly, Mayur Resources Ltd (ASX:MRL) does carry debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Mayur Resources
What Is Mayur Resources's Debt?
As you can see below, at the end of December 2021, Mayur Resources had AU$3.00m of debt, up from none a year ago. Click the image for more detail. However, it does have AU$6.46m in cash offsetting this, leading to net cash of AU$3.46m.
How Healthy Is Mayur Resources' Balance Sheet?
According to the last reported balance sheet, Mayur Resources had liabilities of AU$4.46m due within 12 months, and liabilities of AU$10.0 due beyond 12 months. Offsetting these obligations, it had cash of AU$6.46m as well as receivables valued at AU$176.9k due within 12 months. So it can boast AU$2.17m more liquid assets than total liabilities.
This short term liquidity is a sign that Mayur Resources could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Mayur Resources has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Mayur 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 Mayur Resources finds some valuable resources, before it runs out of money.
So How Risky Is Mayur Resources?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Mayur Resources lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through AU$5.9m of cash and made a loss of AU$6.2m. With only AU$3.46m 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 5 warning signs for Mayur Resources (2 shouldn't be ignored!) that you should be aware of before investing here.
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.
