Focus Graphite (CVE:FMS) Has Debt But No Earnings; Should You Worry?

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. We note that Focus Graphite Inc. (CVE:FMS) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Focus Graphite

What Is Focus Graphite's Debt?

As you can see below, Focus Graphite had CA$2.35m of debt at December 2021, down from CA$3.24m a year prior. However, its balance sheet shows it holds CA$7.74m in cash, so it actually has CA$5.39m net cash.

A Look At Focus Graphite's Liabilities

The latest balance sheet data shows that Focus Graphite had liabilities of CA$7.53m due within a year, and liabilities of CA$58.5k falling due after that. Offsetting this, it had CA$7.74m in cash and CA$1.22m in receivables that were due within 12 months. So it can boast CA$1.37m more liquid assets than total liabilities.

This surplus suggests that Focus Graphite has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Focus Graphite has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Focus Graphite's earnings that will influence how the balance sheet holds up in the future. 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.

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

So How Risky Is Focus Graphite?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Focus Graphite lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CA$5.1m and booked a CA$6.4m accounting loss. With only CA$5.39m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. We've identified 5 warning signs with Focus Graphite (at least 2 which shouldn't be ignored) , 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.