Is Highland Copper (CVE:HI) Weighed On By Its Debt Load?

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.' 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. Importantly, Highland Copper Company Inc. (CVE:HI) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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 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 Highland Copper

What Is Highland Copper's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Highland Copper had US$5.63m of debt, an increase on none, over one year. But on the other hand it also has US$17.1m in cash, leading to a US$11.5m net cash position.

How Strong Is Highland Copper's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Highland Copper had liabilities of US$2.06m due within 12 months and liabilities of US$7.80m due beyond that. Offsetting these obligations, it had cash of US$17.1m as well as receivables valued at US$86.2k due within 12 months. So it actually has US$7.31m more liquid assets than total liabilities.

This surplus suggests that Highland Copper has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Highland Copper 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 it is future earnings, more than anything, that will determine Highland Copper's ability to maintain a healthy balance sheet going forward. 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 Highland Copper finds some valuable resources, before it runs out of money.

So How Risky Is Highland Copper?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Highland Copper lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$12m and booked a US$17m accounting loss. However, it has net cash of US$11.5m, so it has a bit of time before it will need more capital. 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. When analysing debt levels, the balance sheet is the obvious place to start. 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 Highland Copper (of which 2 are a bit unpleasant!) you should know about.

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.

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.