Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital”. When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. Above all, Ascendant Resources Inc. (TSE: ASND) is in debt. But the most important question is: what risk does this debt create?
What risk does debt entail?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, debt can be an important tool in businesses, especially capital intensive businesses. When we think of a business’s use of debt, we first look at cash flow and debt together.
See our latest analysis for bottom-up resources
What is Ascendant Resources’ net debt?
As you can see below, at the end of June 2021, Ascendant Resources was in debt of $ 2.12 million, down from zero a year ago. Click on the image for more details. However, he also had $ 685.0,000 in cash, so his net debt is $ 1.43 million.
How healthy is the bottom-up resource balance?
According to the latest published balance sheet, Ascendant Resources had liabilities of US $ 1.32 million due within 12 months and liabilities of US $ 1.77 million due beyond 12 months. In return, he had US $ 685.0K in cash and US $ 260.0K in receivables due within 12 months. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by $ 2.14 million.
Given that the listed Ascendant Resources shares are worth a total of US $ 13.7 million, it seems unlikely that this level of liabilities is a major threat. But there are enough liabilities that we would certainly recommend that shareholders continue to monitor the balance sheet going forward. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Ascendant Resources can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Over the past year, Ascendant Resources has managed to generate its first revenue as a listed company, but given the lack of profits, shareholders are no doubt hoping to see big increases.
Even though Ascendant Resources has managed to grow its revenue quite adroitly, the hard truth is that it is losing money on the EBIT line. Its EBIT loss was US $ 1.6 million. When we look at this and recall the liabilities on its balance sheet, versus the cash flow, it seems unwise to us that the company has debt. We therefore believe that its record is a bit strained, but not irreparable. However, it doesn’t help that he spent $ 1.7 million in cash in the past year. Suffice it to say that we consider the title very risky. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. To this end, you should inquire about the 4 warning signs we spotted with Ascendant Resources (including 1 which does not suit us too much).
At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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