Would Los Andes Copper (CVE:LA) Be Better Off With Less Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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.

When Is Debt Dangerous?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Los Andes Copper

What Is Los Andes Copper's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 Los Andes Copper had CA$12.6m of debt, an increase on CA$4.25m, over one year. However, it also had CA$9.22m in cash, and so its net debt is CA$3.41m.

How Strong Is Los Andes Copper's Balance Sheet?

We can see from the most recent balance sheet that Los Andes Copper had liabilities of CA$1.62m falling due within a year, and liabilities of CA$29.9m due beyond that. Offsetting these obligations, it had cash of CA$9.22m as well as receivables valued at CA$50.1k due within 12 months. So it has liabilities totalling CA$22.2m more than its cash and near-term receivables, combined.

Of course, Los Andes Copper has a market capitalization of CA$412.3m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Carrying virtually no net debt, Los Andes Copper has a very light debt load indeed. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Given its lack of meaningful operating revenue, investors are probably hoping that Los Andes Copper finds some valuable resources, before it runs out of money.

Caveat Emptor

Importantly, Los Andes Copper had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CA$3.4m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CA$14m of cash over the last year. So suffice it to say we do consider the stock to be risky. 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. We've identified 4 warning signs with Los Andes Copper (at least 2 which are significant) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.