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

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. We can see that BCI Minerals Limited (ASX:BCI) does use debt in its business. But the real question is whether this debt is making the company risky.

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company 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

What Is BCI Minerals's Debt?

As you can see below, at the end of June 2022, BCI Minerals had AU$19.7m of debt, up from none a year ago. Click the image for more detail. However, it does have AU$271.3m in cash offsetting this, leading to net cash of AU$251.6m.

How Strong Is BCI Minerals' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that BCI Minerals had liabilities of AU$58.8m due within 12 months and liabilities of AU$45.4m due beyond that. Offsetting these obligations, it had cash of AU$271.3m as well as receivables valued at AU$21.5m due within 12 months. So it can boast AU$188.7m more liquid assets than total liabilities.

This surplus strongly suggests that BCI Minerals has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, BCI Minerals 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 ultimately the future profitability of the business will decide if BCI Minerals can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year BCI Minerals had a loss before interest and tax, and actually shrunk its revenue by 59%, to AU$65m. To be frank that doesn't bode well.

So How Risky Is BCI Minerals?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that BCI Minerals had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of AU$103m and booked a AU$15m accounting loss. But the saving grace is the AU$251.6m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that BCI Minerals is showing 3 warning signs in our investment analysis , and 2 of those make us uncomfortable...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.