Arianne Phosphate (CVE:DAN) Is Making Moderate Use Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Arianne Phosphate Inc. (CVE:DAN) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 DAN is potentially overvalued!

What Is Arianne Phosphate's Net Debt?

As you can see below, at the end of September 2022, Arianne Phosphate had CA$18.9m of debt, up from CA$17.6m a year ago. Click the image for more detail. On the flip side, it has CA$3.62m in cash leading to net debt of about CA$15.3m.

How Strong Is Arianne Phosphate's Balance Sheet?

The latest balance sheet data shows that Arianne Phosphate had liabilities of CA$2.29m due within a year, and liabilities of CA$20.7m falling due after that. Offsetting this, it had CA$3.62m in cash and CA$227.1k in receivables that were due within 12 months. So it has liabilities totalling CA$19.1m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Arianne Phosphate is worth CA$78.0m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Arianne Phosphate will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

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

Caveat Emptor

Over the last twelve months Arianne Phosphate produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CA$1.7m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CA$2.1m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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. Case in point: We've spotted 4 warning signs for Arianne Phosphate you should be aware of, and 2 of them can't be ignored.

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.