Is Flinders Mines (ASX:FMS) Weighed On By Its Debt Load?

By
Simply Wall St
Published
December 24, 2020
ASX:FMS
Source: Shutterstock

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Flinders Mines Limited (ASX:FMS) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

View our latest analysis for Flinders Mines

What Is Flinders Mines's Debt?

The chart below, which you can click on for greater detail, shows that Flinders Mines had AU$3.12m in debt in June 2020; about the same as the year before. However, it does have AU$4.10m in cash offsetting this, leading to net cash of AU$979.0k.

debt-equity-history-analysis
ASX:FMS Debt to Equity History December 24th 2020

How Healthy Is Flinders Mines's Balance Sheet?

We can see from the most recent balance sheet that Flinders Mines had liabilities of AU$587.0k falling due within a year, and liabilities of AU$3.79m due beyond that. On the other hand, it had cash of AU$4.10m and AU$47.0k worth of receivables due within a year. So it has liabilities totalling AU$226.0k more than its cash and near-term receivables, combined.

Having regard to Flinders Mines's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the AU$171.4m company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Flinders Mines also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. 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 we do note that Flinders Mines had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through AU$11m of cash and made a loss of AU$8.1m. Given it only has net cash of AU$979.0k, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for Flinders Mines you should be aware of, and 2 of them shouldn't be ignored.

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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