Yahoo Finance Rock star Growth Puts Syrah Resources (ASX:SYR) In A Position To Use Debt
The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Syrah Resources Limited (ASX:SYR) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for Syrah Resources
How Much Debt Does Syrah Resources Carry?
The chart below, which you can click on for greater detail, shows that Syrah Resources had US$69.1m in debt in June 2022; about the same as the year before. But it also has US$168.6m in cash to offset that, meaning it has US$99.5m net cash.
How Healthy Is Syrah Resources' Balance Sheet?
The latest balance sheet data shows that Syrah Resources had liabilities of US$21.9m due within a year, and liabilities of US$104.6m falling due after that. Offsetting these obligations, it had cash of US$168.6m as well as receivables valued at US$8.38m due within 12 months. So it can boast US$50.4m more liquid assets than total liabilities.
This surplus suggests that Syrah Resources has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Syrah Resources boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Syrah Resources can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Syrah Resources wasn't profitable at an EBIT level, but managed to grow its revenue by 468%, to US$70m. That's virtually the hole-in-one of revenue growth!
So How Risky Is Syrah Resources?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Syrah Resources lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$87m and booked a US$42m accounting loss. However, it has net cash of US$99.5m, so it has a bit of time before it will need more capital. Importantly, Syrah Resources's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Syrah Resources you should be aware of.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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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