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.’ 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 Ur-Energy Inc. (TSE:URE) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Ur-Energy’s Net Debt?
You can click the graphic below for the historical numbers, but it shows that Ur-Energy had US$12.2m of debt in June 2019, down from US$17.1m, one year before. However, because it has a cash reserve of US$6.54m, its net debt is less, at about US$5.63m.
How Healthy Is Ur-Energy’s Balance Sheet?
We can see from the most recent balance sheet that Ur-Energy had liabilities of US$7.74m falling due within a year, and liabilities of US$39.4m due beyond that. Offsetting these obligations, it had cash of US$6.54m as well as receivables valued at US$27.0k due within 12 months. So its liabilities total US$40.6m more than the combination of its cash and short-term receivables.
Ur-Energy has a market capitalization of US$91.4m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 Ur-Energy 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.
Over 12 months, Ur-Energy saw its revenue drop to US$16m, which is a fall of 54%. To be frank that doesn’t bode well.
While Ur-Energy’s falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable US$10.0m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn’t help that it burned through US$5.3m of cash over the last year. So suffice it to say we consider the stock very risky. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Ur-Energy insider transactions.
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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