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 seems the smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when assessing how risky a company is. As with several other companies, Serabi Gold plc (LON:SRB) utilizes debt. However, the crucial point is whether this debt is making the company risky.
Understanding the Risk of Debt
Debt becomes a critical issue if a company struggles to repay it, either by seeking capital or using its cash flow. In a worst-case scenario, if a company fails to meet its debt obligations, shareholders could be left with nothing. Diluting shares at a low price to manage debt is a common but costly tactic for companies facing financial strain. It’s important to note that many companies successfully use debt to drive growth without negative consequences. When evaluating debt levels, it’s essential to consider both cash and debt positions together.
The State of Serabi Gold’s Debt
Serabi Gold had US$5.69m in debt in March 2024, a decrease from US$11.4m the previous year, as indicated in the company’s balance sheet. However, with US$11.1m in cash, Serabi Gold holds a net cash value of US$5.37m. Despite having debt, the company maintains a solid cash position.
Analyzing Serabi Gold’s Balance Sheet
According to the latest balance sheet, Serabi Gold faces US$13.9m in liabilities due within 12 months and US$6.87m due beyond 12 months. However, the company also holds US$11.1m in cash and US$4.02m in receivables due within a year. The total liabilities exceed the sum of cash and near-term receivables by US$5.69m. Although this debt level may seem significant, considering the company’s total market value, it does not pose a substantial threat. Monitoring the balance sheet over time remains crucial, despite Serabi Gold currently maintaining net cash and a manageable debt load.
Serabi Gold’s impressive 105% growth in EBIT over the past year indicates a positive trend towards debt repayment. While the balance sheet is a critical aspect to consider, the company’s future profitability will ultimately determine its ability to strengthen its financial position. Additionally, analyzing how efficiently the company converts EBIT into free cash flow is essential in evaluating its debt management capabilities. Serabi Gold experienced a cash outflow in the last three years, emphasizing the importance of improving free cash flow to support debt management.
Conclusion
Despite concerns about Serabi Gold’s liabilities, the company’s net cash of US$5.37m and substantial EBIT growth provide reassurance about its financial stability. Monitoring the company’s balance sheet and profitability trajectory will be crucial in assessing its ability to manage debt effectively. As highlighted in our analysis, understanding a company’s debt profile is vital, but investors should also consider other risks that may impact its financial health.
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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 consider your objectives or financial situation. We aim to provide long-term focused analysis driven by fundamental data. Note that our analysis may not reflect the latest company announcements or material changes in stock prices. Simply Wall St holds no position in any stocks mentioned.
