Is Tungsten Mining (ASX:TGN) Using Debt Sensibly?

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.' 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. Importantly, Tungsten Mining NL (ASX:TGN) does carry debt. But the real question is whether this debt is making the company risky.

AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early.

When Is Debt A Problem?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Tungsten Mining's Net Debt?

As you can see below, at the end of December 2024, Tungsten Mining had AU$4.07m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds AU$4.22m in cash, so it actually has AU$147.8k net cash.

How Healthy Is Tungsten Mining's Balance Sheet?

According to the last reported balance sheet, Tungsten Mining had liabilities of AU$6.15m due within 12 months, and liabilities of AU$7.04m due beyond 12 months. Offsetting this, it had AU$4.22m in cash and AU$1.23m in receivables that were due within 12 months. So its liabilities total AU$7.74m more than the combination of its cash and short-term receivables.

Of course, Tungsten Mining has a market capitalization of AU$80.5m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Tungsten Mining also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Tungsten 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.

View our latest analysis for Tungsten Mining

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

So How Risky Is Tungsten Mining?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Tungsten Mining had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through AU$9.1m of cash and made a loss of AU$6.5m. Given it only has net cash of AU$147.8k, 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. 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 4 warning signs for Tungsten Mining (of which 2 can't be ignored!) you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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.