Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 you assess how risky a company is. We note that Serabi Gold plc (LON:SRB) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Serabi Gold

What Is Serabi Gold's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Serabi Gold had US$6.88m of debt, an increase on none, over one year. But it also has US$9.82m in cash to offset that, meaning it has US$2.94m net cash.

A Look At Serabi Gold's Liabilities

We can see from the most recent balance sheet that Serabi Gold had liabilities of US$11.8m falling due within a year, and liabilities of US$4.78m due beyond that. Offsetting this, it had US$9.82m in cash and US$4.95m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$1.76m.

Given Serabi Gold has a market capitalization of US$26.9m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Serabi Gold also has more cash than debt, so we're pretty confident it can manage its debt safely.

The modesty of its debt load may become crucial for Serabi Gold if management cannot prevent a repeat of the 40% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Serabi Gold can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.