Is Foran Mining (CVE:FOM) A Risky Investment?

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.' 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. We can see that Foran Mining Corporation (CVE:FOM) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Foran Mining

How Much Debt Does Foran Mining Carry?

As you can see below, at the end of December 2022, Foran Mining had CA$33.5m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has CA$87.3m in cash, leading to a CA$53.8m net cash position.

A Look At Foran Mining's Liabilities

Zooming in on the latest balance sheet data, we can see that Foran Mining had liabilities of CA$14.7m due within 12 months and liabilities of CA$34.3m due beyond that. Offsetting this, it had CA$87.3m in cash and CA$802.0k in receivables that were due within 12 months. So it actually has CA$39.1m more liquid assets than total liabilities.

This surplus suggests that Foran Mining has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Foran Mining has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Foran Mining can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

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

So How Risky Is Foran Mining?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Foran Mining had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CA$59m and booked a CA$9.8m accounting loss. Given it only has net cash of CA$53.8m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. For example, we've discovered 2 warning signs for Foran Mining (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.