Does Falco Resources (CVE:FPC) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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, Falco Resources Ltd. (CVE:FPC) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Falco Resources

What Is Falco Resources's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2022 Falco Resources had debt of CA$29.9m, up from CA$26.5m in one year. However, because it has a cash reserve of CA$15.4m, its net debt is less, at about CA$14.4m.

A Look At Falco Resources' Liabilities

According to the last reported balance sheet, Falco Resources had liabilities of CA$34.1m due within 12 months, and liabilities of CA$48.8m due beyond 12 months. Offsetting this, it had CA$15.4m in cash and CA$864.4k in receivables that were due within 12 months. So its liabilities total CA$66.6m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of CA$67.9m, so it does suggest shareholders should keep an eye on Falco Resources' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Falco Resources's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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

Caveat Emptor

Over the last twelve months Falco Resources produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CA$4.5m at the EBIT level. 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. Another cause for caution is that is bled CA$5.8m in negative free cash flow over the last twelve months. 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. Case in point: We've spotted 5 warning signs for Falco Resources you should be aware of, and 2 of them are significant.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.