Health Check: How Prudently Does Ora Banda Mining (ASX:OBM) Use Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Ora Banda Mining Limited (ASX:OBM) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Ora Banda Mining

How Much Debt Does Ora Banda Mining Carry?

As you can see below, at the end of June 2023, Ora Banda Mining had AU$10.9m of debt, up from none a year ago. Click the image for more detail. But it also has AU$24.7m in cash to offset that, meaning it has AU$13.8m net cash.

A Look At Ora Banda Mining's Liabilities

The latest balance sheet data shows that Ora Banda Mining had liabilities of AU$43.0m due within a year, and liabilities of AU$40.6m falling due after that. Offsetting this, it had AU$24.7m in cash and AU$6.47m in receivables that were due within 12 months. So its liabilities total AU$52.3m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Ora Banda Mining is worth AU$187.2m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Ora Banda Mining boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Ora Banda Mining'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.

In the last year Ora Banda Mining had a loss before interest and tax, and actually shrunk its revenue by 12%, to AU$136m. That's not what we would hope to see.

So How Risky Is Ora Banda Mining?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Ora Banda Mining had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through AU$40m of cash and made a loss of AU$44m. With only AU$13.8m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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 Ora Banda Mining has 4 warning signs (and 2 which are a bit unpleasant) we think you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.