Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Bear Creek Mining Corporation (CVE:BCM) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Bear Creek Mining
What Is Bear Creek Mining's Net Debt?
As you can see below, at the end of June 2022, Bear Creek Mining had US$20.3m of debt, up from none a year ago. Click the image for more detail. On the flip side, it has US$12.5m in cash leading to net debt of about US$7.86m.
A Look At Bear Creek Mining's Liabilities
We can see from the most recent balance sheet that Bear Creek Mining had liabilities of US$71.9m falling due within a year, and liabilities of US$81.7m due beyond that. Offsetting this, it had US$12.5m in cash and US$7.50m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$133.7m.
This deficit casts a shadow over the US$74.8m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Bear Creek Mining would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Bear Creek Mining's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
While it hasn't made a profit, at least Bear Creek Mining booked its first revenue as a publicly listed company, in the last twelve months.
Caveat Emptor
Importantly, Bear Creek Mining had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable US$12m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through US$23m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Bear Creek Mining you should be aware of.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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.
About TSXV:BCM
Bear Creek Mining
Engages in the acquisition, exploration, and development of precious and base metal properties in Peru and Mexico.
Slight and fair value.