Here's Why Copper Mountain Mining (TSE:CMMC) Can Afford Some Debt

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.' 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 Copper Mountain Mining Corporation (TSE:CMMC) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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.

See our latest analysis for Copper Mountain Mining

How Much Debt Does Copper Mountain Mining Carry?

As you can see below, Copper Mountain Mining had CA$194.3m of debt at March 2023, down from CA$294.1m a year prior. However, because it has a cash reserve of CA$54.5m, its net debt is less, at about CA$139.8m.

How Strong Is Copper Mountain Mining's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Copper Mountain Mining had liabilities of CA$123.2m due within 12 months and liabilities of CA$370.0m due beyond that. On the other hand, it had cash of CA$54.5m and CA$30.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$408.1m.

This is a mountain of leverage relative to its market capitalization of CA$516.7m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Copper Mountain Mining'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.

In the last year Copper Mountain Mining had a loss before interest and tax, and actually shrunk its revenue by 40%, to CA$308m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Copper Mountain Mining's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CA$21m. 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$85m of cash over the last year. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Copper Mountain Mining that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.