Does Karora Resources (TSE: KRR) have a healthy balance sheet?

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Howard Marks put it well when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried. ” It’s only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Like many other companies Karora Resources Inc. (TSE: KRR) uses debt. But the most important question is: what risk does this debt create?

When Is Debt a Problem?

Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that he must raise new equity at low cost, thereby diluting shareholders over the long term. That said, the most common situation is where a business 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 flow and debt together.

Check out our latest review for Karora Resources

What is the debt of Karora Resources?

As you can see below, Karora Resources had a debt of C $ 33.9 million in September 2021, up from C $ 38.9 million the year before. But it also has C $ 90.8 million in cash to make up for that, which means it has C $ 56.9 million in net cash.

TSX: KRR Debt to Equity History November 10, 2021

How healthy is Karora Resources’ balance sheet?

The latest balance sheet data shows that Karora Resources had C $ 50.9 million in liabilities due within one year and C $ 106.5 million in liabilities due after that. In compensation for these obligations, it had cash of C $ 90.8 million as well as receivables valued at C $ 4.92 million maturing within 12 months. It therefore has liabilities totaling C $ 61.6 million more than its cash and short-term receivables combined.

Of course, Karora Resources has a market cap of C $ 731.9 million, so this liability is likely manageable. However, we think it’s worth keeping an eye on the strength of its balance sheet as it can change over time. Despite her notable liabilities, Karora Resources has a net cash flow, so it is fair to say that she does not have a heavy debt load!

On top of that, we are happy to report that Karora Resources has increased its EBIT by 35%, reducing the specter of future debt repayments. The balance sheet is clearly the area you need to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Karora Resources can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.

Finally, a business needs free cash flow to pay off debts; accounting profits are not enough. Although Karora Resources has net cash on its balance sheet, it is still worth looking at its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast it is building ( or erodes) this cash balance. Over the past three years, Karora Resources has reported free cash flow of 4.4% of its EBIT, which is really quite low. This low level of cash conversion undermines its ability to manage and repay its debts.

In summary

While it is always a good idea to look at a company’s total liabilities, it is very reassuring that Karora Resources has C $ 56.9 million in net cash. And it has impressed us with its EBIT growth of 35% over the past year. We therefore have no problem with the use of debt by Karora Resources. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, Karora Resources has 3 warning signs (and 1 which is potentially serious) we think you should be aware of.

If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash net growth stocks.

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 material. Simply Wall St has no position in any of the stocks mentioned.

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