Foran Mining (TSE:FOM) Has Debt But No Earnings; Should You Worry?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Foran Mining Corporation (TSE:FOM) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Foran Mining

How Much Debt Does Foran Mining Carry?

As you can see below, at the end of September 2024, Foran Mining had CA$59.6m of debt, up from CA$37.5m a year ago. Click the image for more detail. However, it does have CA$424.8m in cash offsetting this, leading to net cash of CA$365.2m.

A Look At Foran Mining's Liabilities

The latest balance sheet data shows that Foran Mining had liabilities of CA$71.7m due within a year, and liabilities of CA$60.4m falling due after that. On the other hand, it had cash of CA$424.8m and CA$4.68m worth of receivables due within a year. So it can boast CA$297.4m more liquid assets than total liabilities.

This excess liquidity suggests that Foran Mining is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Foran Mining has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Foran Mining'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.

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

So How Risky Is Foran Mining?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Foran Mining had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CA$236m of cash and made a loss of CA$6.3m. However, it has net cash of CA$365.2m, so it has a bit of time before it will need more capital. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Foran Mining (at least 2 which can't be ignored) , and understanding them should be part of your investment process.

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.

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

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.