Health Check: How Prudently Does Los Andes Copper (CVE:LA) Use 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.' 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 note that Los Andes Copper Ltd. (CVE:LA) 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 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Los Andes Copper

What Is Los Andes Copper's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2021 Los Andes Copper had debt of CA$6.28m, up from none in one year. But on the other hand it also has CA$8.77m in cash, leading to a CA$2.49m net cash position.

How Strong Is Los Andes Copper's Balance Sheet?

According to the last reported balance sheet, Los Andes Copper had liabilities of CA$969.0k due within 12 months, and liabilities of CA$15.1m due beyond 12 months. Offsetting this, it had CA$8.77m in cash and CA$7.7k in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$7.31m.

Having regard to Los Andes Copper's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CA$379.9m company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Los Andes Copper also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 Los Andes Copper 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 Los Andes Copper has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.

So How Risky Is Los Andes Copper?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Los Andes Copper had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CA$1.2m and booked a CA$1.6m accounting loss. But the saving grace is the CA$2.49m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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, we've discovered 3 warning signs for Los Andes Copper (2 are a bit concerning!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.