Kutcho Copper (CVE:KC) Is Carrying A Fair Bit Of Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that Kutcho Copper Corp. (CVE:KC) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Kutcho Copper

How Much Debt Does Kutcho Copper Carry?

The image below, which you can click on for greater detail, shows that at January 2022 Kutcho Copper had debt of CA$30.8m, up from CA$27.2m in one year. However, it does have CA$1.33m in cash offsetting this, leading to net debt of about CA$29.5m.

How Strong Is Kutcho Copper's Balance Sheet?

According to the last reported balance sheet, Kutcho Copper had liabilities of CA$6.35m due within 12 months, and liabilities of CA$33.7m due beyond 12 months. On the other hand, it had cash of CA$1.33m and CA$334.6k worth of receivables due within a year. So its liabilities total CA$38.4m more than the combination of its cash and short-term receivables.

Kutcho Copper has a market capitalization of CA$70.7m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But it is Kutcho Copper's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

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. To be specific the EBIT loss came in at CA$3.9m. 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. 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. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 6 warning signs for Kutcho Copper you should be aware of, and 3 of them are a bit concerning.

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.