We Think Arianne Phosphate (CVE:DAN) Has A Fair Chunk Of Debt

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. Importantly, Arianne Phosphate Inc. (CVE:DAN) does carry 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 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out 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 Arianne Phosphate had CA$24.5m of debt in March 2024, down from CA$26.1m, one year before. On the flip side, it has CA$2.64m in cash leading to net debt of about CA$21.9m.

How Healthy Is Arianne Phosphate's Balance Sheet?

According to the last reported balance sheet, Arianne Phosphate had liabilities of CA$2.44m due within 12 months, and liabilities of CA$26.4m due beyond 12 months. Offsetting this, it had CA$2.64m in cash and CA$312.3k in receivables that were due within 12 months. So its liabilities total CA$25.9m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Arianne Phosphate has a market capitalization of CA$45.7m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. 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

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$2.5m. 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CA$1.9m 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. However, not all investment risk resides within the balance sheet - far from it. Be aware that Arianne Phosphate is showing 4 warning signs in our investment analysis , and 2 of those are a bit concerning...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com