Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Cyprium Metals Limited (ASX:CYM) makes use of debt. But is this debt a concern to shareholders?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for Cyprium Metals
What Is Cyprium Metals's Net Debt?
The image below, which you can click on for greater detail, shows that at June 2021 Cyprium Metals had debt of AU$28.1m, up from none in one year. But on the other hand it also has AU$50.6m in cash, leading to a AU$22.5m net cash position.
How Healthy Is Cyprium Metals' Balance Sheet?
According to the last reported balance sheet, Cyprium Metals had liabilities of AU$8.45m due within 12 months, and liabilities of AU$64.6m due beyond 12 months. Offsetting this, it had AU$50.6m in cash and AU$215.0k in receivables that were due within 12 months. So its liabilities total AU$22.2m more than the combination of its cash and short-term receivables.
Given Cyprium Metals has a market capitalization of AU$127.1m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Cyprium Metals boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Cyprium Metals's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Given its lack of meaningful operating revenue, investors are probably hoping that Cyprium Metals finds some valuable resources, before it runs out of money.
So How Risky Is Cyprium Metals?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Cyprium Metals lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of AU$34m and booked a AU$11m accounting loss. But at least it has AU$22.5m on the balance sheet to spend on growth, near-term. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for Cyprium Metals (of which 3 don't sit too well with us!) you should know about.
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.
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.
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