Does Arianne Phosphate (CVE:DAN) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Arianne Phosphate Inc. (CVE:DAN) makes use of debt. But the more important question is: how much risk is that debt creating?

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. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Arianne Phosphate

How Much Debt Does Arianne Phosphate Carry?

The image below, which you can click on for greater detail, shows that Arianne Phosphate had debt of CA$16.9m at the end of June 2021, a reduction from CA$33.6m over a year. However, it also had CA$5.61m in cash, and so its net debt is CA$11.3m.

How Strong Is Arianne Phosphate's Balance Sheet?

We can see from the most recent balance sheet that Arianne Phosphate had liabilities of CA$675.3k falling due within a year, and liabilities of CA$20.0m due beyond that. Offsetting this, it had CA$5.61m in cash and CA$311.2k in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$14.8m.

While this might seem like a lot, it is not so bad since Arianne Phosphate has a market capitalization of CA$55.6m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Arianne Phosphate will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

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

Caveat Emptor

Importantly, Arianne Phosphate had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CA$1.2m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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$2.0m of cash over the last year. So to be blunt we think it is 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. Be aware that Arianne Phosphate is showing 5 warning signs in our investment analysis , and 3 of those are concerning...

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.
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