Is Treasury Metals (TSE:TML) Weighed On By Its Debt Load?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. Importantly, Treasury Metals Inc. (TSE:TML) does carry 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Treasury Metals

How Much Debt Does Treasury Metals Carry?

As you can see below, Treasury Metals had CA$10.2m of debt at June 2023, down from CA$17.8m a year prior. However, its balance sheet shows it holds CA$11.2m in cash, so it actually has CA$980.8k 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$3.07m due within 12 months and liabilities of CA$15.8m due beyond that. Offsetting these obligations, it had cash of CA$11.2m as well as receivables valued at CA$344.2k due within 12 months. So it has liabilities totalling CA$7.33m more than its cash and near-term receivables, combined.

Since publicly traded Treasury Metals shares are worth a total of CA$40.1m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Treasury Metals boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Treasury Metals 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.

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?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Treasury Metals had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CA$13m of cash and made a loss of CA$18m. Given it only has net cash of CA$980.8k, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. For example, we've discovered 5 warning signs for Treasury Metals (3 make us uncomfortable!) 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.