Is Treasury Metals (TSE:TML) A Risky Investment?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Treasury Metals Inc. (TSE:TML) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Treasury Metals

What Is Treasury Metals's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 Treasury Metals had CA$5.54m of debt, an increase on CA$4.63m, over one year. However, because it has a cash reserve of CA$5.48m, its net debt is less, at about CA$58.6k.

How Strong Is Treasury Metals' Balance Sheet?

The latest balance sheet data shows that Treasury Metals had liabilities of CA$3.56m due within a year, and liabilities of CA$8.35m falling due after that. Offsetting these obligations, it had cash of CA$5.48m as well as receivables valued at CA$1.00m due within 12 months. So its liabilities total CA$5.42m more than the combination of its cash and short-term receivables.

Given Treasury Metals has a market capitalization of CA$48.3m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Carrying virtually no net debt, Treasury Metals has a very light debt load indeed. There's no doubt that we learn most about debt from the balance sheet. 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.

Given its lack of meaningful operating revenue, investors are probably hoping that Treasury Metals finds some valuable resources, before it runs out of money.

Caveat Emptor

Importantly, Treasury Metals had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CA$4.3m at the EBIT level. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CA$20m of cash over the last year. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 4 warning signs we've spotted with Treasury Metals (including 2 which make us uncomfortable) .

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.