Is Arizona Sonoran Copper (TSE:ASCU) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Arizona Sonoran Copper Company Inc. (TSE:ASCU) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Arizona Sonoran Copper

How Much Debt Does Arizona Sonoran Copper Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Arizona Sonoran Copper had debt of US$5.81m, up from none in one year. But it also has US$12.1m in cash to offset that, meaning it has US$6.27m net cash.

How Strong Is Arizona Sonoran Copper's Balance Sheet?

According to the last reported balance sheet, Arizona Sonoran Copper had liabilities of US$10.0m due within 12 months, and liabilities of US$15.8m due beyond 12 months. Offsetting this, it had US$12.1m in cash and US$84.0k in receivables that were due within 12 months. So it has liabilities totalling US$13.7m more than its cash and near-term receivables, combined.

Since publicly traded Arizona Sonoran Copper shares are worth a total of US$106.8m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Arizona Sonoran Copper boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Arizona Sonoran Copper can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Since Arizona Sonoran Copper has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.

So How Risky Is Arizona Sonoran Copper?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Arizona Sonoran Copper had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$36m of cash and made a loss of US$8.0m. Given it only has net cash of US$6.27m, 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. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Arizona Sonoran Copper that you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com