Is Lion Copper and Gold (CVE:LEO) A Risky Investment?

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.' 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 can see that Lion Copper and Gold Corp. (CVE:LEO) does use debt in its business. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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. 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 Lion Copper and Gold

What Is Lion Copper and Gold's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2023 Lion Copper and Gold had debt of US$3.05m, up from US$905.0k in one year. However, it does have US$7.12m in cash offsetting this, leading to net cash of US$4.07m.

A Look At Lion Copper and Gold's Liabilities

According to the last reported balance sheet, Lion Copper and Gold had liabilities of US$6.99m due within 12 months, and liabilities of US$922.0k due beyond 12 months. Offsetting these obligations, it had cash of US$7.12m as well as receivables valued at US$5.0k due within 12 months. So it has liabilities totalling US$786.0k more than its cash and near-term receivables, combined.

Since publicly traded Lion Copper and Gold shares are worth a total of US$19.2m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Lion Copper and Gold boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Lion Copper and Gold's earnings that will influence how the balance sheet holds up in the future. 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 Lion Copper and Gold has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.

So How Risky Is Lion Copper and Gold?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Lion Copper and Gold lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$769k of cash and made a loss of US$3.7m. Given it only has net cash of US$4.07m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Lion Copper and Gold (of which 2 shouldn't be ignored!) you should know about.

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.