Does Flinders Mines (ASX:FMS) Have A Healthy Balance Sheet?

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. Importantly, Flinders Mines Limited (ASX:FMS) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Flinders Mines

What Is Flinders Mines's Net Debt?

The chart below, which you can click on for greater detail, shows that Flinders Mines had AU$3.19m in debt in December 2021; about the same as the year before. But it also has AU$5.86m in cash to offset that, meaning it has AU$2.67m net cash.

How Healthy Is Flinders Mines' Balance Sheet?

According to the balance sheet data, Flinders Mines had liabilities of AU$6.64m due within 12 months, but no longer term liabilities. Offsetting these obligations, it had cash of AU$5.86m as well as receivables valued at AU$98.0k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$689.0k.

This state of affairs indicates that Flinders Mines' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the AU$86.1m company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Flinders Mines 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 it is Flinders Mines's earnings that will influence how the balance sheet holds up in the future. 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 Flinders Mines finds some valuable resources, before it runs out of money.

So How Risky Is Flinders Mines?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Flinders Mines lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through AU$9.6m of cash and made a loss of AU$3.7m. With only AU$2.67m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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 3 warning signs for Flinders Mines (2 are concerning!) that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.