Here's Why IsoEnergy (CVE:ISO) Can Afford Some Debt

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 can see that IsoEnergy Ltd. (CVE:ISO) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for IsoEnergy

What Is IsoEnergy's Net Debt?

As you can see below, at the end of June 2021, IsoEnergy had CA$18.8m of debt, up from CA$10.0 a year ago. Click the image for more detail. On the flip side, it has CA$17.0m in cash leading to net debt of about CA$1.76m.

How Strong Is IsoEnergy's Balance Sheet?

According to the last reported balance sheet, IsoEnergy had liabilities of CA$164.2k due within 12 months, and liabilities of CA$19.9m due beyond 12 months. Offsetting this, it had CA$17.0m in cash and CA$133.6k in receivables that were due within 12 months. So it has liabilities totalling CA$2.88m more than its cash and near-term receivables, combined.

Having regard to IsoEnergy's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CA$451.9m company is struggling for cash, we still think it's worth monitoring its balance sheet. Carrying virtually no net debt, IsoEnergy has a very light debt load indeed. When analysing debt levels, the balance sheet is the obvious place to start. 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're focused on the future you can check out this free report showing analyst profit forecasts.

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

Caveat Emptor

Over the last twelve months IsoEnergy produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CA$3.8m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CA$7.0m of cash over the last year. So suffice it to say we do consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 5 warning signs for IsoEnergy (2 can't be ignored!) that you should be aware of before investing here.

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.

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.

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