Is Cyprium Metals (ASX:CYM) Using Debt Sensibly?

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.' 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 Cyprium Metals Limited (ASX:CYM) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Cyprium Metals

How Much Debt Does Cyprium Metals Carry?

As you can see below, at the end of June 2021, Cyprium Metals had AU$28.1m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has AU$50.6m in cash, leading to a AU$22.5m net cash position.

A Look At Cyprium Metals' Liabilities

We can see from the most recent balance sheet that Cyprium Metals had liabilities of AU$8.45m falling due within a year, and liabilities of AU$64.6m due beyond that. Offsetting these obligations, it had cash of AU$50.6m as well as receivables valued at AU$215.0k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$22.2m.

Given Cyprium Metals has a market capitalization of AU$118.6m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Cyprium Metals boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Cyprium Metals will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Given its lack of meaningful operating revenue, investors are probably hoping that Cyprium Metals finds some valuable resources, before it runs out of money.

So How Risky Is Cyprium Metals?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Cyprium Metals lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through AU$34m of cash and made a loss of AU$11m. But at least it has AU$22.5m on the balance sheet to spend on growth, near-term. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 5 warning signs for Cyprium Metals (3 don't sit too well with us!) that you should be aware of before investing here.

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. 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.
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