Does Capricorn Metals (ASX:CMM) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Capricorn Metals Ltd (ASX:CMM) makes use of debt. But should shareholders be worried about its use of debt?

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When Is Debt A Problem?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Capricorn Metals

What Is Capricorn Metals's 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. But on the other hand it also has AU$355.7m in cash, leading to a AU$305.0m net cash position.

How Healthy Is Capricorn Metals' Balance Sheet?

The latest balance sheet data shows that Capricorn Metals had liabilities of AU$185.5m due within a year, and liabilities of AU$183.0m falling due after 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$3.39b 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!

In addition to that, we're happy to report that Capricorn Metals has boosted its EBIT by 73%, thus reducing the spectre of future debt repayments. 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 Capricorn Metals can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Capricorn Metals has AU$305.0m in net cash. And it impressed us with free cash flow of AU$84m, being 92% of its EBIT. So is Capricorn Metals's debt a risk? It doesn't seem so to us. Another factor that would give us confidence in Capricorn Metals would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

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.