Cameco (TSE:CCO) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, '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. As with many other companies Cameco Corporation (TSE:CCO) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Cameco

What Is Cameco's Debt?

As you can see below, at the end of June 2023, Cameco had CA$1.12b of debt, up from CA$1.04b a year ago. Click the image for more detail. But on the other hand it also has CA$2.47b in cash, leading to a CA$1.36b net cash position.

A Look At Cameco's Liabilities

We can see from the most recent balance sheet that Cameco had liabilities of CA$987.4m falling due within a year, and liabilities of CA$1.70b due beyond that. Offsetting these obligations, it had cash of CA$2.47b as well as receivables valued at CA$297.1m due within 12 months. So it can boast CA$82.0m more liquid assets than total liabilities.

Having regard to Cameco's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CA$21.9b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Cameco boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Cameco grew its EBIT by 13% last year, making its debt load easier to handle. 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 Cameco 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Cameco has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Cameco actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Cameco has CA$1.36b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CA$189m, being 159% of its EBIT. So we don't think Cameco's use of debt is 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Cameco you should know about.

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.