Here's Why Fortune Minerals (TSE:FT) Can Afford Some Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Fortune Minerals Limited (TSE:FT) does carry 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Fortune Minerals

What Is Fortune Minerals's Debt?

You can click the graphic below for the historical numbers, but it shows that Fortune Minerals had CA$8.35m of debt in March 2023, down from CA$13.2m, one year before. Net debt is about the same, since the it doesn't have much cash.

How Healthy Is Fortune Minerals' Balance Sheet?

We can see from the most recent balance sheet that Fortune Minerals had liabilities of CA$8.61m falling due within a year, and liabilities of CA$295.5k due beyond that. Offsetting these obligations, it had cash of CA$136.8k as well as receivables valued at CA$76.9k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$8.70m.

This deficit isn't so bad because Fortune Minerals is worth CA$25.7m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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. To be specific the EBIT loss came in at CA$2.1m. 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$1.6m of cash over the last year. So suffice it to say we consider the stock very risky. 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. Be aware that Fortune Minerals is showing 5 warning signs in our investment analysis , and 3 of those are potentially serious...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.