Is Los Andes Copper (CVE:LA) Using Debt In A Risky Way?

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.' 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 Los Andes Copper Ltd. (CVE:LA) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Los Andes Copper

How Much Debt Does Los Andes Copper Carry?

As you can see below, at the end of June 2023, Los Andes Copper had CA$12.6m of debt, up from CA$7.55m a year ago. Click the image for more detail. But on the other hand it also has CA$13.0m in cash, leading to a CA$329.5k net cash position.

How Healthy Is Los Andes Copper's Balance Sheet?

The latest balance sheet data shows that Los Andes Copper had liabilities of CA$1.29m due within a year, and liabilities of CA$34.4m falling due after that. Offsetting these obligations, it had cash of CA$13.0m as well as receivables valued at CA$68.6k due within 12 months. So its liabilities total CA$22.7m more than the combination of its cash and short-term receivables.

Given Los Andes Copper has a market capitalization of CA$291.0m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Los Andes Copper can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Los Andes Copper lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CA$11m and booked a CA$9.8m accounting loss. But the saving grace is the CA$329.5k on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Los Andes Copper (of which 2 can't be ignored!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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

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.