Is Fortune Minerals (TSE:FT) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. 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 Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

Check out our latest analysis for Fortune Minerals

How Much Debt Does Fortune Minerals Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 Fortune Minerals had CA$12.8m of debt, an increase on CA$10.0m, over one year. However, it also had CA$1.80m in cash, and so its net debt is CA$11.0m.

A Look At Fortune Minerals' Liabilities

According to the last reported balance sheet, Fortune Minerals had liabilities of CA$11.9m due within 12 months, and liabilities of CA$2.84m due beyond 12 months. On the other hand, it had cash of CA$1.80m and CA$194.0k worth of receivables due within a year. So it has liabilities totalling CA$12.8m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Fortune Minerals has a market capitalization of CA$44.9m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But it is Fortune Minerals's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Given its lack of meaningful operating revenue, investors are probably hoping that Fortune Minerals finds some valuable resources, before it runs out of money.

Caveat Emptor

Over the last twelve months Fortune Minerals produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CA$1.2m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any 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$2.2m of cash over the last year. So suffice it to say we do consider the stock to be 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. To that end, you should learn about the 5 warning signs we've spotted with Fortune Minerals (including 2 which are potentially serious) .

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.