Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that EQ Resources Limited (ASX:EQR) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for EQ Resources

How Much Debt Does EQ Resources Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 EQ Resources had AU$42.6m of debt, an increase on AU$5.14m, over one year. On the flip side, it has AU$3.49m in cash leading to net debt of about AU$39.1m.

How Healthy Is EQ Resources' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that EQ Resources had liabilities of AU$94.2m due within 12 months and liabilities of AU$15.5m due beyond that. Offsetting this, it had AU$3.49m in cash and AU$17.2m in receivables that were due within 12 months. So its liabilities total AU$89.0m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of AU$118.6m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But it is EQ Resources'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.

In the last year EQ Resources wasn't profitable at an EBIT level, but managed to grow its revenue by 162%, to AU$27m. So there's no doubt that shareholders are cheering for growth

Caveat Emptor

Even though EQ Resources managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Its EBIT loss was a whopping AU$26m. 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. 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$27m of cash over the last year. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example EQ Resources has 4 warning signs (and 2 which shouldn't be ignored) we think you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.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.