Is Foran Mining (TSE:FOM) Using Too Much 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Foran Mining Corporation (TSE:FOM) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Foran Mining

What Is Foran Mining's Debt?

As you can see below, at the end of June 2023, Foran Mining had CA$35.2m of debt, up from none a year ago. Click the image for more detail. However, it does have CA$137.3m in cash offsetting this, leading to net cash of CA$102.1m.

How Healthy Is Foran Mining's Balance Sheet?

The latest balance sheet data shows that Foran Mining had liabilities of CA$26.0m due within a year, and liabilities of CA$36.1m falling due after that. Offsetting this, it had CA$137.3m in cash and CA$701.0k in receivables that were due within 12 months. So it can boast CA$75.9m more liquid assets than total liabilities.

This short term liquidity is a sign that Foran Mining could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Foran Mining has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Foran Mining 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 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 in the last year Foran Mining had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CA$73m and booked a CA$12m accounting loss. With only CA$102.1m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for Foran Mining (3 shouldn't be ignored) 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.