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. As with many other companies Arianne Phosphate Inc. (CVE:DAN) makes use of debt. But is this debt a concern to shareholders?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Arianne Phosphate
What Is Arianne Phosphate's Net Debt?
The image below, which you can click on for greater detail, shows that at March 2023 Arianne Phosphate had debt of CA$26.1m, up from CA$19.3m in one year. However, it does have CA$5.15m in cash offsetting this, leading to net debt of about CA$20.9m.
A Look At Arianne Phosphate's Liabilities
Zooming in on the latest balance sheet data, we can see that Arianne Phosphate had liabilities of CA$3.23m due within 12 months and liabilities of CA$27.1m due beyond that. Offsetting these obligations, it had cash of CA$5.15m as well as receivables valued at CA$269.6k due within 12 months. So its liabilities total CA$24.9m more than the combination of its cash and short-term receivables.
This deficit isn't so bad because Arianne Phosphate is worth CA$74.8m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
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. Indeed, it lost CA$1.8m 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. We would feel better if it turned its trailing twelve month loss of CA$6.9m into a profit. 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. Be aware that Arianne Phosphate is showing 4 warning signs in our investment analysis , and 2 of those are significant...
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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:DAN
Arianne Phosphate
Engages in the acquisition and exploration of mining properties in Canada.
Slight with mediocre balance sheet.