Would Kutcho Copper (CVE:KC) Be Better Off With Less Debt?

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.' 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?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Kutcho Copper

What Is Kutcho Copper's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of July 2021 Kutcho Copper had CA$28.9m of debt, an increase on CA$25.2m, over one year. However, it also had CA$4.29m in cash, and so its net debt is CA$24.7m.

How Strong Is Kutcho Copper's Balance Sheet?

The latest balance sheet data shows that Kutcho Copper had liabilities of CA$5.14m due within a year, and liabilities of CA$33.3m falling due after that. Offsetting this, it had CA$4.29m in cash and CA$112.1k in receivables that were due within 12 months. So it has liabilities totalling CA$34.1m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Kutcho Copper is worth CA$93.7m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. 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.

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

Caveat Emptor

Importantly, Kutcho Copper had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CA$2.3m 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$6.8m of cash over the last year. 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. Be aware that Kutcho Copper is showing 6 warning signs in our investment analysis , and 3 of those are concerning...

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.

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.

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