Is Arianne Phosphate (CVE:DAN) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. 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?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Arianne Phosphate

What Is Arianne Phosphate's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Arianne Phosphate had CA$25.1m of debt, an increase on CA$18.0m, over one year. However, because it has a cash reserve of CA$4.23m, its net debt is less, at about CA$20.9m.

How Strong Is Arianne Phosphate's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Arianne Phosphate had liabilities of CA$2.30m due within 12 months and liabilities of CA$26.9m due beyond that. Offsetting these obligations, it had cash of CA$4.23m as well as receivables valued at CA$176.5k due within 12 months. So its liabilities total CA$24.8m more than the combination of its cash and short-term receivables.

Arianne Phosphate has a market capitalization of CA$47.2m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Arianne Phosphate's earnings that will influence how the balance sheet holds up in the future. 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

Importantly, Arianne Phosphate had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CA$1.9m at the EBIT level. 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. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of CA$5.0m. So to be blunt we do 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Arianne Phosphate (of which 2 don't sit too well with us!) you should know about.

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.