Capricorn Metals (ASX:CMM) Seems To Use Debt Rather Sparingly

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Capricorn Metals Ltd (ASX:CMM) does carry debt. But the real question is whether this debt is making the company risky.

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What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Capricorn Metals's Net Debt?

As you can see below, Capricorn Metals had AU$50.6m of debt, at December 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have AU$355.7m in cash offsetting this, leading to net cash of AU$305.0m.

How Strong Is Capricorn Metals' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Capricorn Metals had liabilities of AU$185.5m due within 12 months and liabilities of AU$183.0m due beyond that. Offsetting these obligations, it had cash of AU$355.7m as well as receivables valued at AU$7.03m due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Capricorn Metals' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the AU$4.43b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Capricorn Metals boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for Capricorn Metals

On top of that, Capricorn Metals grew its EBIT by 73% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Capricorn Metals may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Capricorn Metals generated free cash flow amounting to a very robust 92% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

We could understand if investors are concerned about Capricorn Metals's liabilities, but we can be reassured by the fact it has has net cash of AU$305.0m. The cherry on top was that in converted 92% of that EBIT to free cash flow, bringing in AU$84m. So we don't think Capricorn Metals's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Capricorn Metals's earnings per share history for free.

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.

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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.