Is Venus Metals (ASX:VMC) Using Debt Sensibly?

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 note that Venus Metals Corporation Limited (ASX:VMC) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Venus Metals

What Is Venus Metals's Net Debt?

As you can see below, at the end of December 2022, Venus Metals had AU$5.43m of debt, up from AU$3.72m a year ago. Click the image for more detail. But on the other hand it also has AU$6.44m in cash, leading to a AU$1.00m net cash position.

How Strong Is Venus Metals' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Venus Metals had liabilities of AU$5.64m due within 12 months and no liabilities due beyond that. Offsetting these obligations, it had cash of AU$6.44m as well as receivables valued at AU$272.0k due within 12 months. So it can boast AU$1.07m more liquid assets than total liabilities.

This short term liquidity is a sign that Venus Metals could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Venus Metals boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Venus Metals will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

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?

By their very nature companies that are losing money are more risky than those with a long history of profitability. 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$3.7m and booked a AU$6.7m accounting loss. However, it has net cash of AU$1.00m, so it has a bit of time before it will need more capital. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 5 warning signs with Venus Metals (at least 2 which can't be ignored) , and understanding them should be part of your investment process.

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.

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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.