Here's Why Arianne Phosphate (CVE:DAN) Can Afford Some 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. Importantly, Arianne Phosphate Inc. (CVE:DAN) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Check out our latest analysis for Arianne Phosphate

What Is Arianne Phosphate's Debt?

The image below, which you can click on for greater detail, shows that Arianne Phosphate had debt of CA$18.4m at the end of December 2021, a reduction from CA$36.5m over a year. However, because it has a cash reserve of CA$5.03m, its net debt is less, at about CA$13.4m.

How Strong Is Arianne Phosphate's Balance Sheet?

We can see from the most recent balance sheet that Arianne Phosphate had liabilities of CA$2.46m falling due within a year, and liabilities of CA$20.1m due beyond that. On the other hand, it had cash of CA$5.03m and CA$216.6k worth of receivables due within a year. So it has liabilities totalling CA$17.3m more than its cash and near-term receivables, combined.

Of course, Arianne Phosphate has a market capitalization of CA$134.6m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. There's no doubt that we learn most about debt from the balance sheet. But it is Arianne Phosphate's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

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$1.5m. 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. Another cause for caution is that is bled CA$2.5m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. 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. To that end, you should learn about the 4 warning signs we've spotted with Arianne Phosphate (including 2 which can't be ignored) .

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.