Is Los Andes Copper (CVE:LA) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Los Andes Copper Ltd. (CVE:LA) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 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 March 2024 Los Andes Copper had debt of CA$13.9m, up from CA$12.6m in one year. However, it does have CA$30.1m in cash offsetting this, leading to net cash of CA$16.3m.

How Healthy Is Los Andes Copper's Balance Sheet?

According to the last reported balance sheet, Los Andes Copper had liabilities of CA$904.4k due within 12 months, and liabilities of CA$28.5m due beyond 12 months. Offsetting this, it had CA$30.1m in cash and CA$925.1k in receivables that were due within 12 months. So it can boast CA$1.68m more liquid assets than total liabilities.

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$295.2m company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Los Andes Copper has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Los Andes 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.

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?

While Los Andes Copper lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CA$16m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Los Andes Copper .

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com