These 4 Measures Indicate That Sayona Mining (ASX:SYA) Is Using Debt Reasonably Well

Simply Wall St

Thu, Apr 21, 2022, 6:21 PM 4 min read

Warren Buffett famously said, '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. Importantly, Sayona Mining Limited (ASX:SYA) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Sayona Mining

What Is Sayona Mining's Net Debt?

As you can see below, at the end of December 2021, Sayona Mining had AU$21.9m of debt, up from none a year ago. Click the image for more detail. However, it does have AU$32.3m in cash offsetting this, leading to net cash of AU$10.4m.

debt-equity-history-analysis — ASX:SYA Debt to Equity History April 22nd 2022

How Strong Is Sayona Mining's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sayona Mining had liabilities of AU$7.57m due within 12 months and liabilities of AU$62.7m due beyond that. Offsetting this, it had AU$32.3m in cash and AU$2.66m in receivables that were due within 12 months. So it has liabilities totalling AU$35.3m more than its cash and near-term receivables, combined.

This state of affairs indicates that Sayona Mining's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the AU$2.51b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Sayona Mining boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Sayona Mining made a loss at the EBIT level, last year, it was also good to see that it generated AU$96m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is Sayona Mining's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Sayona Mining has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Considering the last year, Sayona Mining actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing up

We could understand if investors are concerned about Sayona Mining's liabilities, but we can be reassured by the fact it has has net cash of AU$10.4m. So we are not troubled with Sayona Mining's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Sayona Mining has 4 warning signs (and 2 which make us uncomfortable) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.