Is EMX Royalty (CVE:EMX) Using Debt In A Risky Way?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 EMX Royalty Corporation (CVE:EMX) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for EMX Royalty

What Is EMX Royalty's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 EMX Royalty had CA$54.1m of debt, an increase on none, over one year. But on the other hand it also has CA$63.2m in cash, leading to a CA$9.02m net cash position.

How Strong Is EMX Royalty's Balance Sheet?

According to the balance sheet data, EMX Royalty had liabilities of CA$59.4m due within 12 months, but no longer term liabilities. On the other hand, it had cash of CA$63.2m and CA$5.55m worth of receivables due within a year. So it can boast CA$9.33m more liquid assets than total liabilities.

This surplus suggests that EMX Royalty has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, EMX Royalty boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine EMX Royalty's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year EMX Royalty wasn't profitable at an EBIT level, but managed to grow its revenue by 72%, to CA$9.9m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is EMX Royalty?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year EMX Royalty had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CA$13m of cash and made a loss of CA$23m. But the saving grace is the CA$9.02m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. With very solid revenue growth in the last year, EMX Royalty may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. For instance, we've identified 3 warning signs for EMX Royalty (1 is a bit concerning) you should be aware of.

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.

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

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.