Health Check: How Prudently Does Fission Uranium (TSE:FCU) Use Debt?

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 Fission Uranium Corp. (TSE:FCU) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Fission Uranium

What Is Fission Uranium's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2021 Fission Uranium had debt of CA$7.63m, up from CA$7.10m in one year. But it also has CA$53.9m in cash to offset that, meaning it has CA$46.3m net cash.

How Strong Is Fission Uranium's Balance Sheet?

According to the last reported balance sheet, Fission Uranium had liabilities of CA$1.65m due within 12 months, and liabilities of CA$10.5m due beyond 12 months. Offsetting this, it had CA$53.9m in cash and CA$241.8k in receivables that were due within 12 months. So it actually has CA$42.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Fission Uranium could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Fission Uranium has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Fission Uranium 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.

Given its lack of meaningful operating revenue, Fission Uranium shareholders no doubt hope it can fund itself until it can sell some combustibles.

So How Risky Is Fission Uranium?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Fission Uranium had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CA$23m and booked a CA$6.8m accounting loss. Given it only has net cash of CA$46.3m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Fission Uranium is showing 5 warning signs in our investment analysis , and 1 of those is potentially serious...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.