We Think K92 Mining (TSE:KNT) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, K92 Mining Inc. (TSE:KNT) 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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for K92 Mining

What Is K92 Mining's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 K92 Mining had debt of US$59.0m, up from none in one year. But on the other hand it also has US$120.3m in cash, leading to a US$61.3m net cash position.

How Strong Is K92 Mining's Balance Sheet?

We can see from the most recent balance sheet that K92 Mining had liabilities of US$67.2m falling due within a year, and liabilities of US$72.2m due beyond that. On the other hand, it had cash of US$120.3m and US$33.2m worth of receivables due within a year. So it can boast US$14.2m more liquid assets than total liabilities.

Having regard to K92 Mining's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$1.68b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, K92 Mining boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that K92 Mining grew its EBIT by 153% over twelve months. That boost will make it even easier to pay down debt going forward. 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 K92 Mining's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While K92 Mining has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, K92 Mining recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While it is always sensible to investigate a company's debt, in this case K92 Mining has US$61.3m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 153% over the last year. So we don't have any problem with K92 Mining's use of debt. 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. To that end, you should learn about the 2 warning signs we've spotted with K92 Mining (including 1 which is potentially serious) .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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.