Does Horizon Minerals (ASX:HRZ) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Horizon Minerals Limited (ASX:HRZ) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Horizon Minerals

What Is Horizon Minerals's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Horizon Minerals had debt of AU$4.59m, up from none in one year. But it also has AU$15.8m in cash to offset that, meaning it has AU$11.2m net cash.

How Healthy Is Horizon Minerals' Balance Sheet?

According to the last reported balance sheet, Horizon Minerals had liabilities of AU$8.51m due within 12 months, and liabilities of AU$1.36m due beyond 12 months. Offsetting these obligations, it had cash of AU$15.8m as well as receivables valued at AU$4.64m due within 12 months. So it actually has AU$10.5m more liquid assets than total liabilities.

This excess liquidity suggests that Horizon Minerals is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Horizon Minerals has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Horizon Minerals 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.

In the last year Horizon Minerals wasn't profitable at an EBIT level, but managed to grow its revenue by 22,126%, to AU$12m. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

So How Risky Is Horizon Minerals?

While Horizon Minerals lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of AU$601k. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. Keeping in mind its 22,126% revenue growth over the last year, we think there's a decent chance the company is on track. There's no doubt fast top line growth can cure all manner of ills, for a stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 4 warning signs for Horizon Minerals that you should be aware of before investing here.

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. 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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