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Warren Buffett said: “Volatility is far from synonymous with risk”. It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. We can see that Los Andes Copper Ltd. (CVE: LA) uses debt in its business. But does this debt worry shareholders?
When Is Debt a Problem?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still painful) scenario is that he must raise new equity at low cost, thereby diluting shareholders over the long term. 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 thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
See our latest review for Los Andes Copper
What is Los Andes Copper’s net debt?
As you can see below, at the end of June 2021, Los Andes Copper had C $ 5.91 million in debt, up from none a year ago. Click on the image for more details. However, it has C $ 9.92 million in cash offsetting this, leading to net cash of C $ 4.01 million.
A look at the liabilities of Los Andes Copper
According to the latest published balance sheet, Los Andes Copper had a liability of CA $ 625.7,000 due within 12 months and a liability of CA $ 15.1 million due beyond 12 months. In return, he had C $ 9.92 million in cash and C $ 7.2,000 in receivables due within 12 months. It therefore has a liability totaling C $ 5.85 million more than its cash and short-term receivables combined.
Of course, Los Andes Copper has a market cap of C $ 197.0 million, so this liability is likely manageable. But there are enough liabilities that we would certainly recommend that shareholders continue to monitor the balance sheet going forward. Despite its notable liabilities, Los Andes Copper has a net cash flow, so it’s fair to say that it doesn’t have a heavy debt load! There is no doubt that we learn the most about debt from the balance sheet. But you can’t look at debt in isolation; since Los Andes Copper will need income to repay this debt. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.
Given that Los Andes Copper does not have significant operating income, shareholders are likely hoping it will develop a new value mine before too long.
So how risky is Los Andes copper?
Although Los Andes Copper recorded a loss of earnings before interest and taxes (EBIT) over the past twelve months, it generated positive free cash flow of C $ 1.1 million. Thus, although it is in deficit, it does not appear to present too much short-term balance sheet risk, given the net cash position. Until we see positive EBIT, we remain a little cautious about the stock, especially given the rather modest revenue growth. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. Concrete example: we have spotted 1 warning sign for Los Andes Copper you must be aware.
At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit 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 using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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