Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Ur-Energy Inc. (TSE:URE) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Ur-Energy's Debt?
As you can see below, at the end of September 2020, Ur-Energy had US$13.2m of debt, up from US$12.2m a year ago. Click the image for more detail. On the flip side, it has US$6.64m in cash leading to net debt of about US$6.52m.
How Healthy Is Ur-Energy's Balance Sheet?
We can see from the most recent balance sheet that Ur-Energy had liabilities of US$3.22m falling due within a year, and liabilities of US$44.5m due beyond that. On the other hand, it had cash of US$6.64m and US$14.0k worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$41.1m.
Ur-Energy has a market capitalization of US$86.6m, 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 it is future earnings, more than anything, that will determine Ur-Energy'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.
In the last year Ur-Energy had a loss before interest and tax, and actually shrunk its revenue by 11%, to US$19m. That's not what we would hope to see.
Not only did Ur-Energy's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost US$7.6m 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. Another cause for caution is that is bled US$1.5m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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. Like risks, for instance. Every company has them, and we've spotted 4 warning signs for Ur-Energy (of which 2 make us uncomfortable!) you should know about.
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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