Health Check: How Prudently Does Falco Resources (CVE:FPC) Use Debt?

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.' 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. We can see that Falco Resources Ltd. (CVE:FPC) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View 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 June 2024 Falco Resources had debt of CA$36.2m, up from CA$33.1m in one year. However, it does have CA$3.68m in cash offsetting this, leading to net debt of about CA$32.5m.

How Healthy Is Falco Resources' Balance Sheet?

We can see from the most recent balance sheet that Falco Resources had liabilities of CA$38.7m falling due within a year, and liabilities of CA$62.4m due beyond that. Offsetting this, it had CA$3.68m in cash and CA$452.0k in receivables that were due within 12 months. So its liabilities total CA$97.0m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of CA$103.7m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Falco Resources 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 Falco Resources finds some valuable resources, before it runs out of money.

Caveat Emptor

Importantly, Falco Resources had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CA$3.3m at the EBIT level. 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$5.1m of cash over the last year. So suffice it to say we do consider the stock to be 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. We've identified 4 warning signs with Falco Resources (at least 2 which are a bit unpleasant) , and understanding them should be part of your investment process.

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.