Would IsoEnergy (CVE:ISO) Be Better Off With Less 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 note that IsoEnergy Ltd. (CVE:ISO) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for IsoEnergy

What Is IsoEnergy's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 IsoEnergy had CA$32.3m of debt, an increase on CA$16.7m, over one year. However, because it has a cash reserve of CA$19.0m, its net debt is less, at about CA$13.2m.

How Strong Is IsoEnergy's Balance Sheet?

The latest balance sheet data shows that IsoEnergy had liabilities of CA$1.87m due within a year, and liabilities of CA$34.4m falling due after that. Offsetting this, it had CA$19.0m in cash and CA$155.4k in receivables that were due within 12 months. So it has liabilities totalling CA$17.1m more than its cash and near-term receivables, combined.

Of course, IsoEnergy has a market capitalization of CA$317.2m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Given its lack of meaningful operating revenue, IsoEnergy shareholders no doubt hope it can fund itself until it can sell some combustibles.

Caveat Emptor

Importantly, IsoEnergy had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CA$7.0m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CA$10m 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. Case in point: We've spotted 4 warning signs for IsoEnergy you should be aware of, and 2 of them are concerning.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.