Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Hycroft Mining Holding Corporation (NASDAQ:HYMC) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Hycroft Mining Holding Carry?
The image below, which you can click on for greater detail, shows that Hycroft Mining Holding had debt of US$139.7m at the end of March 2022, a reduction from US$153.3m over a year. However, it does have US$173.0m in cash offsetting this, leading to net cash of US$33.3m.
How Strong Is Hycroft Mining Holding's Balance Sheet?
We can see from the most recent balance sheet that Hycroft Mining Holding had liabilities of US$15.3m falling due within a year, and liabilities of US$178.8m due beyond that. On the other hand, it had cash of US$173.0m and US$1.53m worth of receivables due within a year. So its liabilities total US$19.5m more than the combination of its cash and short-term receivables.
Given Hycroft Mining Holding has a market capitalization of US$254.2m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Hycroft Mining Holding also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Hycroft Mining Holding can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Hycroft Mining Holding reported revenue of US$101m, which is a gain of 84%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Hycroft Mining Holding?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Hycroft Mining Holding lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$31m of cash and made a loss of US$101m. Given it only has net cash of US$33.3m, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, Hycroft Mining Holding may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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 instance, we've identified 3 warning signs for Hycroft Mining Holding (1 is significant) you should be aware of.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.