We Think Focus Graphite (CVE:FMS) Has A Fair Chunk Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Focus Graphite Inc. (CVE:FMS) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Focus Graphite

How Much Debt Does Focus Graphite Carry?

The chart below, which you can click on for greater detail, shows that Focus Graphite had CA$2.36m in debt in June 2023; about the same as the year before. However, it does have CA$189.0k in cash offsetting this, leading to net debt of about CA$2.17m.

A Look At Focus Graphite's Liabilities

Zooming in on the latest balance sheet data, we can see that Focus Graphite had liabilities of CA$5.85m due within 12 months and liabilities of CA$112.5k due beyond that. Offsetting this, it had CA$189.0k in cash and CA$914.5k in receivables that were due within 12 months. So its liabilities total CA$4.86m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Focus Graphite has a market capitalization of CA$16.2m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Since Focus Graphite has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.

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$2.1m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CA$6.7m of cash over the last year. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Focus Graphite is showing 5 warning signs in our investment analysis , and 3 of those can't be ignored...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.