Is EMX Royalty (CVE:EMX) Using Too Much 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, EMX Royalty Corporation (CVE:EMX) does carry debt. But is this debt a concern to shareholders?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for EMX Royalty

How Much Debt Does EMX Royalty Carry?

The image below, which you can click on for greater detail, shows that at September 2023 EMX Royalty had debt of US$41.9m, up from US$40.0m in one year. However, because it has a cash reserve of US$30.1m, its net debt is less, at about US$11.9m.

How Healthy Is EMX Royalty's Balance Sheet?

We can see from the most recent balance sheet that EMX Royalty had liabilities of US$7.14m falling due within a year, and liabilities of US$43.3m due beyond that. Offsetting this, it had US$30.1m in cash and US$11.7m in receivables that were due within 12 months. So its liabilities total US$8.68m more than the combination of its cash and short-term receivables.

Given EMX Royalty has a market capitalization of US$191.8m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is EMX Royalty'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.

In the last year EMX Royalty wasn't profitable at an EBIT level, but managed to grow its revenue by 16%, to US$21m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, EMX Royalty had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$2.1m. 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 US$5.1m. So to be blunt we do think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with EMX Royalty .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.