Would Horizon Minerals (ASX:HRZ) Be Better Off With Less Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Horizon Minerals Limited (ASX:HRZ) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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?

The image below, which you can click on for greater detail, shows that at December 2023 Horizon Minerals had debt of AU$6.95m, up from AU$3.02m in one year. However, because it has a cash reserve of AU$5.54m, its net debt is less, at about AU$1.41m.

How Strong Is Horizon Minerals' Balance Sheet?

We can see from the most recent balance sheet that Horizon Minerals had liabilities of AU$8.46m falling due within a year, and liabilities of AU$1.80m due beyond that. Offsetting this, it had AU$5.54m in cash and AU$121.0k in receivables that were due within 12 months. So its liabilities total AU$4.61m more than the combination of its cash and short-term receivables.

Since publicly traded Horizon Minerals shares are worth a total of AU$26.6m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Given its lack of meaningful operating revenue, investors are probably hoping that Horizon Minerals finds some valuable resources, before it runs out of money.

Caveat Emptor

Importantly, Horizon Minerals had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping AU$5.2m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled AU$8.3m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for Horizon Minerals (of which 2 don't sit too well with us!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.