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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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, Syrah Resources Limited (ASX:SYR) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Syrah Resources
What Is Syrah Resources's Net Debt?
As you can see below, at the end of June 2021, Syrah Resources had US$69.4m of debt, up from US$40.6m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$85.6m in cash, so it actually has US$16.2m net cash.
How Strong Is Syrah Resources' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Syrah Resources had liabilities of US$18.2m due within 12 months and liabilities of US$111.8m due beyond that. Offsetting this, it had US$85.6m in cash and US$5.07m in receivables that were due within 12 months. So its liabilities total US$39.4m more than the combination of its cash and short-term receivables.
Given Syrah Resources has a market capitalization of US$427.4m, 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. Despite its noteworthy liabilities, Syrah Resources boasts net cash, so it's fair to say it does not have a heavy debt load! 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 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 had a loss before interest and tax, and actually shrunk its revenue by 62%, to US$12m. To be frank that doesn't bode well.