Is Venus Metals (ASX:VMC) Using Debt In A Risky Way?

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. As with many other companies Venus Metals Corporation Limited (ASX:VMC) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out the opportunities and risks within the AU Metals and Mining industry.

What Is Venus Metals's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Venus Metals had AU$4.55m of debt, an increase on AU$1.93m, over one year. But on the other hand it also has AU$6.48m in cash, leading to a AU$1.93m net cash position.

A Look At Venus Metals' Liabilities

The latest balance sheet data shows that Venus Metals had liabilities of AU$5.01m due within a year, and liabilities of AU$1.1k falling due after that. Offsetting these obligations, it had cash of AU$6.48m as well as receivables valued at AU$277.6k due within 12 months. So it actually has AU$1.75m more liquid assets than total liabilities.

This surplus suggests that Venus Metals has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Venus Metals has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Venus Metals's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

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

So How Risky Is Venus Metals?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Venus Metals lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of AU$3.9m and booked a AU$7.3m accounting loss. But at least it has AU$1.93m on the balance sheet to spend on growth, near-term. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. To that end, you should learn about the 4 warning signs we've spotted with Venus Metals (including 2 which are a bit unpleasant) .

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.