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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Energy Fuels Inc. (TSE:EFR) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
What Is Energy Fuels's Debt?
You can click the graphic below for the historical numbers, but it shows that Energy Fuels had US$7.90m of debt in September 2020, down from US$16.6m, one year before. However, it does have US$28.1m in cash offsetting this, leading to net cash of US$20.2m.
How Strong Is Energy Fuels' Balance Sheet?
The latest balance sheet data shows that Energy Fuels had liabilities of US$13.7m due within a year, and liabilities of US$20.9m falling due after that. On the other hand, it had cash of US$28.1m and US$964.0k worth of receivables due within a year. So it has liabilities totalling US$5.54m more than its cash and near-term receivables, combined.
This state of affairs indicates that Energy Fuels' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$725.6m company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Energy Fuels 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 it is future earnings, more than anything, that will determine Energy Fuels's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Energy Fuels made a loss at the EBIT level, and saw its revenue drop to US$2.0m, which is a fall of 76%. To be frank that doesn't bode well.
So How Risky Is Energy Fuels?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Energy Fuels had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$35m and booked a US$32m accounting loss. Given it only has net cash of US$20.2m, 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Energy Fuels is showing 6 warning signs in our investment analysis , 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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