Fortune Minerals (TSE:FT) Is Making Moderate Use Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Fortune Minerals Limited (TSE:FT) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Fortune Minerals

What Is Fortune Minerals's Debt?

As you can see below, at the end of December 2020, Fortune Minerals had CA$10.0m of debt, up from CA$8.63m a year ago. Click the image for more detail. On the flip side, it has CA$1.08m in cash leading to net debt of about CA$8.93m.

How Healthy Is Fortune Minerals' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Fortune Minerals had liabilities of CA$499.8k due within 12 months and liabilities of CA$11.7m due beyond that. Offsetting these obligations, it had cash of CA$1.08m as well as receivables valued at CA$68.5k due within 12 months. So it has liabilities totalling CA$11.0m more than its cash and near-term receivables, combined.

Given Fortune Minerals has a market capitalization of CA$59.7m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Fortune Minerals's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

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

Caveat Emptor

Importantly, Fortune Minerals had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CA$905k at the EBIT level. 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. However, it doesn't help that it burned through CA$1.2m of cash over the last year. So suffice it to say we do consider the stock to be risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Fortune Minerals (of which 1 is potentially serious!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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