Health Check: How Prudently Does Treasury Metals (TSE:TML) Use 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. We note that Treasury Metals Inc. (TSE:TML) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

Our analysis indicates that TML is potentially undervalued!

How Much Debt Does Treasury Metals Carry?

As you can see below, at the end of June 2022, Treasury Metals had CA$6.34m of debt, up from CA$4.89m a year ago. Click the image for more detail. However, its balance sheet shows it holds CA$24.4m in cash, so it actually has CA$18.1m net cash.

A Look At Treasury Metals' Liabilities

Zooming in on the latest balance sheet data, we can see that Treasury Metals had liabilities of CA$8.87m due within 12 months and liabilities of CA$12.2m due beyond that. On the other hand, it had cash of CA$24.4m and CA$1.25m worth of receivables due within a year. So it can boast CA$4.58m more liquid assets than total liabilities.

This surplus suggests that Treasury Metals has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Treasury Metals boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Treasury Metals can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Since Treasury Metals has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.

So How Risky Is Treasury Metals?

Although Treasury Metals had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CA$2.1m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Treasury Metals (of which 1 is significant!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.