Capricorn Metals (ASX:CMM) Has Debt But No Earnings; Should You Worry?

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. We can see that Capricorn Metals Ltd (ASX:CMM) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Capricorn Metals

How Much Debt Does Capricorn Metals Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Capricorn Metals had AU$2.51m of debt, an increase on none, over one year. However, its balance sheet shows it holds AU$19.0m in cash, so it actually has AU$16.5m net cash.

How Strong Is Capricorn Metals' Balance Sheet?

We can see from the most recent balance sheet that Capricorn Metals had liabilities of AU$14.3m falling due within a year, and liabilities of AU$14.1m due beyond that. Offsetting this, it had AU$19.0m in cash and AU$1.64m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$7.85m.

This state of affairs indicates that Capricorn Metals' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the AU$545.5m company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Capricorn Metals also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Capricorn Metals's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Since Capricorn Metals has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.

So How Risky Is Capricorn Metals?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Capricorn Metals had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through AU$93m of cash and made a loss of AU$8.1m. While this does make the company a bit risky, it's important to remember it has net cash of AU$16.5m. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, Capricorn Metals may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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. To that end, you should learn about the 4 warning signs we've spotted with Capricorn Metals (including 3 which are significant) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. 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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