Is Kutcho Copper (CVE:KC) Using Too Much Debt?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Kutcho Copper Corp. (CVE:KC) does have debt on its balance sheet. 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 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Kutcho Copper

How Much Debt Does Kutcho Copper Carry?

As you can see below, at the end of January 2022, Kutcho Copper had CA$30.8m of debt, up from CA$27.2m a year ago. Click the image for more detail. On the flip side, it has CA$1.33m in cash leading to net debt of about CA$29.5m.

A Look At Kutcho Copper's Liabilities

We can see from the most recent balance sheet that Kutcho Copper had liabilities of CA$6.35m falling due within a year, and liabilities of CA$33.7m due beyond that. Offsetting this, it had CA$1.33m in cash and CA$334.6k in receivables that were due within 12 months. So it has liabilities totalling CA$38.4m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of CA$42.3m, so it does suggest shareholders should keep an eye on Kutcho Copper's 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 you can't view debt in total isolation; since Kutcho Copper will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

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

Caveat Emptor

Importantly, Kutcho Copper had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CA$3.9m 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$13m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. We've identified 6 warning signs with Kutcho Copper (at least 4 which are potentially serious) , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.