Is IsoEnergy (TSE:ISO) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that IsoEnergy Ltd. (TSE:ISO) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for IsoEnergy

How Much Debt Does IsoEnergy Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 IsoEnergy had CA$42.2m of debt, an increase on CA$25.9m, over one year. However, its balance sheet shows it holds CA$66.6m in cash, so it actually has CA$24.4m net cash.

How Healthy Is IsoEnergy's Balance Sheet?

According to the last reported balance sheet, IsoEnergy had liabilities of CA$49.0m due within 12 months, and liabilities of CA$3.26m due beyond 12 months. On the other hand, it had cash of CA$66.6m and CA$341.8k worth of receivables due within a year. So it actually has CA$14.7m more liquid assets than total liabilities.

This short term liquidity is a sign that IsoEnergy could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, IsoEnergy 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 IsoEnergy's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Since IsoEnergy doesn't have significant operating revenue, shareholders must hope it'll sell some fossil fuels, before it runs out of money.

So How Risky Is IsoEnergy?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that IsoEnergy 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$24m and booked a CA$28m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of CA$24.4m. That means it could keep spending at its current rate for more than two years. 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with IsoEnergy .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.