Would Fortune Minerals (TSE:FT) Be Better Off With Less 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?

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, 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View 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 September 2022 Fortune Minerals had CA$13.9m of debt, an increase on CA$12.3m, over one year. However, because it has a cash reserve of CA$520.6k, its net debt is less, at about CA$13.3m.

A Look At Fortune Minerals' Liabilities

Zooming in on the latest balance sheet data, we can see that Fortune Minerals had liabilities of CA$14.1m due within 12 months and liabilities of CA$320.1k due beyond that. Offsetting these obligations, it had cash of CA$520.6k as well as receivables valued at CA$32.0k due within 12 months. So its liabilities total CA$13.9m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Fortune Minerals has a market capitalization of CA$26.7m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 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. Indeed, it lost CA$1.8m at the EBIT level. 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. 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$2.9m of cash over the last year. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Fortune Minerals has 5 warning signs (and 2 which don't sit too well with us) we think 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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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.