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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, IsoEnergy Ltd. (CVE:ISO) does carry 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. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does IsoEnergy Carry?
You can click the graphic below for the historical numbers, but it shows that as of September 2021 IsoEnergy had CA$22.4m of debt, an increase on CA$6.59m, over one year. However, it does have CA$24.8m in cash offsetting this, leading to net cash of CA$2.47m.
How Healthy Is IsoEnergy's Balance Sheet?
We can see from the most recent balance sheet that IsoEnergy had liabilities of CA$2.61m falling due within a year, and liabilities of CA$25.1m due beyond that. On the other hand, it had cash of CA$24.8m and CA$229.9k worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$2.70m.
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$354.7m company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, IsoEnergy also has more cash than debt, so we're pretty confident 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 IsoEnergy 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, IsoEnergy shareholders no doubt hope it can fund itself until it can sell some combustibles.
So How Risky Is IsoEnergy?
We have no doubt that loss making companies are, in general, riskier than profitable ones. 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$6.3m and booked a CA$19m accounting loss. Given it only has net cash of CA$2.47m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for IsoEnergy you should be aware of, and 1 of them makes us a bit uncomfortable.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.