Nagambie Resources (ASX:NAG) Is Making Moderate Use Of Debt

Simply Wall St · 10/15 21:38

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 you assess how risky a company is. We note that Nagambie Resources Limited (ASX:NAG) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Nagambie Resources

What Is Nagambie Resources's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Nagambie Resources had AU$4.58m of debt in June 2024, down from AU$7.07m, one year before. However, it does have AU$437.7k in cash offsetting this, leading to net debt of about AU$4.15m.

debt-equity-history-analysis
ASX:NAG Debt to Equity History October 15th 2024

A Look At Nagambie Resources' Liabilities

We can see from the most recent balance sheet that Nagambie Resources had liabilities of AU$1.37m falling due within a year, and liabilities of AU$6.64m due beyond that. Offsetting this, it had AU$437.7k in cash and AU$46.1k in receivables that were due within 12 months. So its liabilities total AU$7.52m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Nagambie Resources is worth AU$15.1m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Nagambie Resources will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Since Nagambie Resources has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.

Caveat Emptor

Not only did Nagambie Resources's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at AU$1.5m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through AU$3.0m of cash over the last year. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 6 warning signs with Nagambie Resources (at least 4 which can't be ignored) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.