Is Beacon Minerals (ASX:BCN) Using Debt In A Risky Way?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Beacon Minerals Limited (ASX:BCN) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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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.

How Much Debt Does Beacon Minerals Carry?

The image below, which you can click on for greater detail, shows that at December 2024 Beacon Minerals had debt of AU$9.21m, up from AU$3.09m in one year. However, its balance sheet shows it holds AU$16.6m in cash, so it actually has AU$7.38m net cash.

How Strong Is Beacon Minerals' Balance Sheet?

We can see from the most recent balance sheet that Beacon Minerals had liabilities of AU$16.1m falling due within a year, and liabilities of AU$33.3m due beyond that. Offsetting this, it had AU$16.6m in cash and AU$1.92m in receivables that were due within 12 months. So it has liabilities totalling AU$30.9m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Beacon Minerals is worth AU$126.8m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Beacon Minerals also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Beacon Minerals will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

See our latest analysis for Beacon Minerals

In the last year Beacon Minerals had a loss before interest and tax, and actually shrunk its revenue by 11%, to AU$75m. That's not what we would hope to see.

So How Risky Is Beacon Minerals?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Beacon Minerals had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through AU$7.0m of cash and made a loss of AU$8.9m. Given it only has net cash of AU$7.38m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Beacon Minerals you should be aware of, and 1 of them is potentially serious.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.