Would Arianne Phosphate (CVE:DAN) Be Better Off With Less Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Arianne Phosphate Inc. (CVE:DAN) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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

How Much Debt Does Arianne Phosphate Carry?

You can click the graphic below for the historical numbers, but it shows that Arianne Phosphate had CA$17.6m of debt in September 2021, down from CA$35.0m, one year before. On the flip side, it has CA$5.42m in cash leading to net debt of about CA$12.2m.

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$431.0k due within 12 months and liabilities of CA$20.9m due beyond that. Offsetting these obligations, it had cash of CA$5.42m as well as receivables valued at CA$220.4k due within 12 months. So its liabilities total CA$15.6m more than the combination of its cash and short-term receivables.

Given Arianne Phosphate has a market capitalization of CA$102.0m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. When analysing debt levels, the balance sheet is the obvious place to start. 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.

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$1.2m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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$2.5m of cash over the last year. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 5 warning signs with Arianne Phosphate (at least 3 which are a bit unpleasant) , and understanding them should be part of your investment process.

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.