Health Check: How Prudently Does Excelsior Mining (TSE:MIN) Use Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Excelsior Mining Corp. (TSE:MIN) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Excelsior Mining

What Is Excelsior Mining's Debt?

The image below, which you can click on for greater detail, shows that Excelsior Mining had debt of US$15.3m at the end of September 2021, a reduction from US$16.3m over a year. However, it does have US$24.5m in cash offsetting this, leading to net cash of US$9.19m.

How Healthy Is Excelsior Mining's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Excelsior Mining had liabilities of US$20.6m due within 12 months and liabilities of US$118.8m due beyond that. Offsetting these obligations, it had cash of US$24.5m as well as receivables valued at US$287.0k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$114.6m.

Given this deficit is actually higher than the company's market capitalization of US$92.4m, we think shareholders really should watch Excelsior Mining's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. Given that Excelsior Mining has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Excelsior Mining can strengthen its balance sheet over time. 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 Excelsior Mining finds some valuable resources, before it runs out of money.

So How Risky Is Excelsior Mining?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Excelsior Mining 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$17m and booked a US$29m accounting loss. With only US$9.19m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. We've identified 5 warning signs with Excelsior Mining (at least 2 which can't be ignored) , 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.

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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