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

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Focus Graphite Inc. (CVE:FMS) does carry debt. But the more important question is: how much risk is that debt creating?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Focus Graphite

What Is Focus Graphite's Debt?

As you can see below, Focus Graphite had CA$2.36m of debt, at December 2022, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has CA$1.02m in cash leading to net debt of about CA$1.34m.

How Healthy Is Focus Graphite's Balance Sheet?

We can see from the most recent balance sheet that Focus Graphite had liabilities of CA$6.81m falling due within a year, and liabilities of CA$112.5k due beyond that. Offsetting this, it had CA$1.02m in cash and CA$1.52m in receivables that were due within 12 months. So its liabilities total CA$4.38m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Focus Graphite is worth CA$20.9m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Focus Graphite will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

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

Caveat Emptor

Over the last twelve months Focus Graphite produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping CA$2.4m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CA$9.5m of cash over the last year. So suffice it to say we consider the stock very 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. For example Focus Graphite has 7 warning signs (and 3 which make us uncomfortable) we think you should know about.

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.