Health Check: How Carefully Does BCI Minerals (ASX:BCI) Use Debt?

Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. We can see that BCI Minerals Limited (ASX:BCI) uses debt in its business. But the real question is whether this debt makes the business risky.

Why is debt risky?

Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business 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 BCI Minerals

How much debt does BCI Minerals have?

As you can see below, at the end of June 2022, BCI Minerals had a debt of 19.7 million Australian dollars, compared to none a year ago. Click on the image for more details. However, he has A$271.3 million in cash to offset this, which translates to a net cash of A$251.6 million.

How strong is BCI Minerals’ balance sheet?

Zooming in on the latest balance sheet data, we can see that BCI Minerals had liabilities of A$58.8 million due within 12 months and liabilities of A$45.4 million due beyond. In compensation for these obligations, it had liquid assets of 271.3 million Australian dollars as well as receivables valued at 21.5 million Australian dollars and due within 12 months. He can therefore boast of having 188.7 million Australian dollars more in cash than total Passives.

This surplus strongly suggests that BCI Minerals has a rock-solid balance sheet (and debt is nothing to worry about). Given this fact, we believe its balance sheet is as strong as an ox. In short, BCI Minerals has clean cash, so it’s fair to say that it doesn’t have a lot of debt! The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether BCI Minerals can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

Last year, BCI Minerals recorded a loss before interest and tax and actually reduced its revenue by 59%, to A$65 million. To be honest, that doesn’t bode well.

So how risky is BCI Minerals?

We have no doubt that loss-making companies are, in general, more risky than profitable companies. And we note that BCI Minerals posted a loss in earnings before interest and taxes (EBIT) over the past year. And over the same period, it had a negative free cash outflow of A$103 million and recorded a book loss of A$15 million. But the saving grace is the A$251.6 million on the balance sheet. This pot means that the company can continue to spend on growth for at least two years, at current rates. Even if its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company does not produce free cash flow regularly. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. Know that BCI Minerals shows 3 warning signs in our investment analysis and 2 of them make us uncomfortable…

In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.