Is Falco Resources (CVE:FPC) A Risky Investment?

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 note that Falco Resources Ltd. (CVE:FPC) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Falco Resources

What Is Falco Resources's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 Falco Resources had CA$28.9m of debt, an increase on CA$25.5m, over one year. However, it does have CA$20.0m in cash offsetting this, leading to net debt of about CA$8.95m.

How Strong Is Falco Resources' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Falco Resources had liabilities of CA$34.0m due within 12 months and liabilities of CA$47.4m due beyond that. Offsetting this, it had CA$20.0m in cash and CA$984.9k in receivables that were due within 12 months. So it has liabilities totalling CA$60.4m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of CA$85.5m, so it does suggest shareholders should keep an eye on Falco Resources' 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 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.

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

Caveat Emptor

Importantly, Falco Resources had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CA$5.3m 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CA$5.8m of cash over the last year. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Falco Resources has 4 warning signs (and 2 which are potentially serious) we think 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.