Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 can see that Sigma Lithium Corporation (NASDAQ:SGML) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 Sigma Lithium
What Is Sigma Lithium's Debt?
As you can see below, at the end of September 2023, Sigma Lithium had CA$150.4m of debt, up from none a year ago. Click the image for more detail. However, because it has a cash reserve of CA$38.1m, its net debt is less, at about CA$112.3m.
How Strong Is Sigma Lithium's Balance Sheet?
According to the last reported balance sheet, Sigma Lithium had liabilities of CA$99.8m due within 12 months, and liabilities of CA$136.6m due beyond 12 months. Offsetting this, it had CA$38.1m in cash and CA$77.1m in receivables that were due within 12 months. So it has liabilities totalling CA$121.1m more than its cash and near-term receivables, combined.
Of course, Sigma Lithium has a market capitalization of CA$3.51b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Sigma Lithium's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
While it hasn't made a profit, at least Sigma Lithium booked its first revenue as a publicly listed company, in the last twelve months.
Caveat Emptor
Over the last twelve months Sigma Lithium produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CA$93m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CA$200m in negative free cash flow over the last twelve months. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Sigma Lithium is showing 2 warning signs in our investment analysis , you should know about...
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.