Is Mineral Commodities (ASX:MRC) Using Debt Sensibly?

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. We note that Mineral Commodities Ltd (ASX:MRC) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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 Mineral Commodities

What Is Mineral Commodities's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2021 Mineral Commodities had debt of US$3.85m, up from US$3.30m in one year. However, it does have US$4.37m in cash offsetting this, leading to net cash of US$520.4k.

How Strong Is Mineral Commodities' Balance Sheet?

The latest balance sheet data shows that Mineral Commodities had liabilities of US$16.3m due within a year, and liabilities of US$10.7m falling due after that. Offsetting these obligations, it had cash of US$4.37m as well as receivables valued at US$7.74m due within 12 months. So its liabilities total US$14.8m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Mineral Commodities is worth US$50.2m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Mineral Commodities also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Mineral Commodities'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.

Over 12 months, Mineral Commodities made a loss at the EBIT level, and saw its revenue drop to US$50m, which is a fall of 21%. That makes us nervous, to say the least.

So How Risky Is Mineral Commodities?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Mineral Commodities lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$12m and booked a US$3.3m accounting loss. Given it only has net cash of US$520.4k, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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 - Mineral Commodities has 3 warning signs we think you should be aware of.

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.