We Think PolyMet Mining (TSE:POM) Has A Fair Chunk Of 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies PolyMet Mining Corp. (TSE:POM) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 PolyMet Mining

How Much Debt Does PolyMet Mining Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 PolyMet Mining had US$97.9m of debt, an increase on US$62.7m, over one year. However, it also had US$9.85m in cash, and so its net debt is US$88.1m.

A Look At PolyMet Mining's Liabilities

The latest balance sheet data shows that PolyMet Mining had liabilities of US$103.4m due within a year, and liabilities of US$32.8m falling due after that. On the other hand, it had cash of US$9.85m and US$1.05m worth of receivables due within a year. So it has liabilities totalling US$125.3m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of US$160.3m, so it does suggest shareholders should keep an eye on PolyMet Mining's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But it is PolyMet Mining'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 PolyMet Mining finds some valuable resources, before it runs out of money.

Caveat Emptor

Importantly, PolyMet Mining had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$15m. 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 US$28m of cash over the last year. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for PolyMet Mining 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.