Is Focus Graphite (CVE:FMS) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Focus Graphite

What Is Focus Graphite's Net Debt?

The image below, which you can click on for greater detail, shows that Focus Graphite had debt of CA$2.35m at the end of March 2022, a reduction from CA$2.51m over a year. However, its balance sheet shows it holds CA$5.70m in cash, so it actually has CA$3.35m net cash.

How Strong Is Focus Graphite's Balance Sheet?

The latest balance sheet data shows that Focus Graphite had liabilities of CA$7.60m due within a year, and liabilities of CA$58.6k falling due after that. On the other hand, it had cash of CA$5.70m and CA$1.60m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$357.6k.

Given Focus Graphite has a market capitalization of CA$12.7m, 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. While it does have liabilities worth noting, Focus Graphite also has more cash than debt, so we're pretty confident 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?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Focus Graphite had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CA$5.1m of cash and made a loss of CA$6.4m. Given it only has net cash of CA$3.35m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. For example Focus Graphite has 5 warning signs (and 3 which are concerning) we think you should know about.

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.

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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.