Is Queensland Pacific Metals (ASX:QPM) Using Debt Sensibly?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 can see that Queensland Pacific Metals Limited (ASX:QPM) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Queensland Pacific Metals

What Is Queensland Pacific Metals's Net Debt?

As you can see below, at the end of June 2024, Queensland Pacific Metals had AU$18.1m of debt, up from none a year ago. Click the image for more detail. However, it does have AU$25.4m in cash offsetting this, leading to net cash of AU$7.28m.

How Strong Is Queensland Pacific Metals' Balance Sheet?

According to the last reported balance sheet, Queensland Pacific Metals had liabilities of AU$127.6m due within 12 months, and liabilities of AU$71.7m due beyond 12 months. On the other hand, it had cash of AU$25.4m and AU$9.30m worth of receivables due within a year. So it has liabilities totalling AU$164.6m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the AU$103.4m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Queensland Pacific Metals would likely require a major re-capitalisation if it had to pay its creditors today. Queensland Pacific Metals boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Queensland Pacific Metals can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

While it hasn't made a profit, at least Queensland Pacific Metals booked its first revenue as a publicly listed company, in the last twelve months.

So How Risky Is Queensland Pacific Metals?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Queensland Pacific Metals had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through AU$27m of cash and made a loss of AU$24m. Given it only has net cash of AU$7.28m, 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. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Queensland Pacific Metals you should know about.

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.