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.' 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. We note that Ivanhoe Mines Ltd. (TSE:IVN) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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.
What Is Ivanhoe Mines's Debt?
The image below, which you can click on for greater detail, shows that at June 2021 Ivanhoe Mines had debt of US$465.5m, up from US$37.5m in one year. But it also has US$644.5m in cash to offset that, meaning it has US$178.9m net cash.
How Strong Is Ivanhoe Mines' Balance Sheet?
According to the last reported balance sheet, Ivanhoe Mines had liabilities of US$22.8m due within 12 months, and liabilities of US$695.2m due beyond 12 months. On the other hand, it had cash of US$644.5m and US$65.2m worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.
Having regard to Ivanhoe Mines' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$8.97b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Ivanhoe Mines also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Ivanhoe Mines's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Given its lack of meaningful operating revenue, investors are probably hoping that Ivanhoe Mines finds some valuable resources, before it runs out of money.
So How Risky Is Ivanhoe Mines?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Ivanhoe Mines had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$102m and booked a US$87m accounting loss. Given it only has net cash of US$178.9m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. We've identified 1 warning sign with Ivanhoe Mines , and understanding them should be part of your investment process.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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.
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