Is Eskay Mining (CVE:ESK) Using Debt Sensibly?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Eskay Mining Corp. (CVE:ESK) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Eskay Mining

How Much Debt Does Eskay Mining Carry?

As you can see below, at the end of August 2022, Eskay Mining had CA$2.66m of debt, up from none a year ago. Click the image for more detail. But it also has CA$10.4m in cash to offset that, meaning it has CA$7.71m net cash.

How Healthy Is Eskay Mining's Balance Sheet?

According to the last reported balance sheet, Eskay Mining had liabilities of CA$6.38m due within 12 months, and liabilities of CA$94.0k due beyond 12 months. Offsetting this, it had CA$10.4m in cash and CA$686.3k in receivables that were due within 12 months. So it actually has CA$4.59m more liquid assets than total liabilities.

This short term liquidity is a sign that Eskay Mining could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Eskay Mining boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Eskay Mining'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.

Given its lack of meaningful operating revenue, investors are probably hoping that Eskay Mining finds some valuable resources, before it runs out of money.

So How Risky Is Eskay Mining?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Eskay Mining had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CA$15m and booked a CA$22m accounting loss. But the saving grace is the CA$7.71m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. For example, we've discovered 4 warning signs for Eskay Mining (3 are significant!) that you should be aware of before investing here.

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.