Here's Why Pacific Nickel Mines (ASX:PNM) Can Afford Some Debt

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Pacific Nickel Mines Limited (ASX:PNM) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Check out our latest analysis for Pacific Nickel Mines

What Is Pacific Nickel Mines's Debt?

As you can see below, at the end of June 2023, Pacific Nickel Mines had AU$4.64m of debt, up from AU$65.0k a year ago. Click the image for more detail. However, it also had AU$1.14m in cash, and so its net debt is AU$3.49m.

A Look At Pacific Nickel Mines' Liabilities

Zooming in on the latest balance sheet data, we can see that Pacific Nickel Mines had liabilities of AU$769.1k due within 12 months and liabilities of AU$4.64m due beyond that. Offsetting these obligations, it had cash of AU$1.14m as well as receivables valued at AU$31.1k due within 12 months. So its liabilities total AU$4.23m more than the combination of its cash and short-term receivables.

Of course, Pacific Nickel Mines has a market capitalization of AU$40.6m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But it is Pacific Nickel Mines'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.

Since Pacific Nickel Mines has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.

Caveat Emptor

Importantly, Pacific Nickel Mines had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost AU$834k at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled AU$11m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. To that end, you should learn about the 4 warning signs we've spotted with Pacific Nickel Mines (including 3 which are significant) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.