Would PolyMet Mining (TSE:POM) Be Better Off With Less Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, PolyMet Mining Corp. (TSE:POM) does carry debt. But should shareholders be worried about its use of debt?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for PolyMet Mining

What Is PolyMet Mining's Net Debt?

As you can see below, at the end of September 2022, PolyMet Mining had US$81.2m of debt, up from US$52.4m a year ago. Click the image for more detail. On the flip side, it has US$8.60m in cash leading to net debt of about US$72.5m.

A Look At PolyMet Mining's Liabilities

We can see from the most recent balance sheet that PolyMet Mining had liabilities of US$86.8m falling due within a year, and liabilities of US$57.4m due beyond that. Offsetting this, it had US$8.60m in cash and US$1.05m in receivables that were due within 12 months. So its liabilities total US$134.5m more than the combination of its cash and short-term receivables.

PolyMet Mining has a market capitalization of US$265.5m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. 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

Over the last twelve months PolyMet Mining produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at US$13m. 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. Another cause for caution is that is bled US$20m in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for PolyMet Mining that you should be aware of before investing here.

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.