Is Horizon Minerals (ASX:HRZ) A Risky Investment?

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.' 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. As with many other companies Horizon Minerals Limited (ASX:HRZ) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Net Debt?

The image below, which you can click on for greater detail, shows that at December 2022 Horizon Minerals had debt of AU$3.02m, up from none in one year. However, it does have AU$1.45m in cash offsetting this, leading to net debt of about AU$1.57m.

How Healthy Is Horizon Minerals' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Horizon Minerals had liabilities of AU$1.54m due within 12 months and liabilities of AU$4.62m due beyond that. Offsetting this, it had AU$1.45m in cash and AU$256.2k in receivables that were due within 12 months. So its liabilities total AU$4.46m more than the combination of its cash and short-term receivables.

Since publicly traded Horizon Minerals shares are worth a total of AU$24.4m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Horizon Minerals had a loss before interest and tax, and actually shrunk its revenue by 54%, to AU$3.0m. To be frank that doesn't bode well.

Caveat Emptor

While Horizon Minerals's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable AU$34m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through AU$12m of cash over the last year. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 4 warning signs for Horizon Minerals (1 shouldn't be ignored!) that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.