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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Horizon Minerals Limited (ASX:HRZ) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Horizon Minerals

How Much Debt Does Horizon Minerals Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Horizon Minerals had AU$4.59m of debt, an increase on none, over one year. But on the other hand it also has AU$15.8m in cash, leading to a AU$11.2m net cash position.

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.

It's good to see that Horizon Minerals has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. 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. When analysing debt levels, the balance sheet is the obvious place to start. 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 25,742%, to AU$14m. 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 taking that on face value, and considering the cash, we don't think its very risky in the near term. We think its revenue growth of 25,742% is a good sign. There's no doubt fast top line growth can cure all manner of ills, for a stock. 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. Be aware that Horizon Minerals is showing 3 warning signs in our investment analysis , you should know about...

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. 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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