Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Horizonte Minerals Plc (LON:HZM) does use debt in its business. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.
What Is Horizonte Minerals's Debt?
As you can see below, at the end of March 2022, Horizonte Minerals had US$136.1m of debt, up from US$32.1m a year ago. Click the image for more detail. But on the other hand it also has US$251.8m in cash, leading to a US$115.7m net cash position.
How Healthy Is Horizonte Minerals' Balance Sheet?
According to the last reported balance sheet, Horizonte Minerals had liabilities of US$15.3m due within 12 months, and liabilities of US$148.6m due beyond 12 months. On the other hand, it had cash of US$251.8m and US$18.3m worth of receivables due within a year. So it actually has US$106.1m more liquid assets than total liabilities.
This luscious liquidity implies that Horizonte Minerals' balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Horizonte Minerals has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Horizonte Minerals'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.
Since Horizonte Minerals has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.
So How Risky Is Horizonte Minerals?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that Horizonte Minerals had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$63m of cash and made a loss of US$6.8m. But at least it has US$115.7m on the balance sheet to spend on growth, near-term. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. Be aware that Horizonte Minerals is showing 3 warning signs in our investment analysis , and 2 of those are potentially serious...
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.
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.