Would Focus Graphite (CVE:FMS) Be Better Off With Less Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, Focus Graphite Inc. (CVE:FMS) does carry debt. But the real question is whether this debt is making the company risky.

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. 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.

See our latest analysis for Focus Graphite

What Is Focus Graphite's Net Debt?

The chart below, which you can click on for greater detail, shows that Focus Graphite had CA$2.30m in debt in June 2024; about the same as the year before. On the flip side, it has CA$290.0k in cash leading to net debt of about CA$2.01m.

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$5.36m due within 12 months and liabilities of CA$52.5k due beyond that. Offsetting these obligations, it had cash of CA$290.0k as well as receivables valued at CA$105.4k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$5.02m.

This deficit is considerable relative to its market capitalization of CA$7.18m, so it does suggest shareholders should keep an eye on Focus Graphite's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. 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.

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

Caveat Emptor

Importantly, Focus Graphite had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping CA$1.4m. 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$2.1m 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Focus Graphite (of which 3 don't sit too well with us!) 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.