Is Lion Copper and Gold (CVE:LEO) Using Debt Sensibly?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Lion Copper and Gold Corp. (CVE:LEO) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Lion Copper and Gold

What Is Lion Copper and Gold's Debt?

The image below, which you can click on for greater detail, shows that at September 2022 Lion Copper and Gold had debt of US$1.63m, up from none in one year. But on the other hand it also has US$2.25m in cash, leading to a US$617.0k net cash position.

How Healthy Is Lion Copper and Gold's Balance Sheet?

According to the last reported balance sheet, Lion Copper and Gold had liabilities of US$2.23m due within 12 months, and liabilities of US$1.63m due beyond 12 months. Offsetting these obligations, it had cash of US$2.25m as well as receivables valued at US$4.0k due within 12 months. So it has liabilities totalling US$1.61m more than its cash and near-term receivables, combined.

Since publicly traded Lion Copper and Gold shares are worth a total of US$15.9m, 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. While it does have liabilities worth noting, Lion Copper and Gold 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 it is Lion Copper and Gold's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

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?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Lion Copper and Gold had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$7.9m and booked a US$2.2m accounting loss. Given it only has net cash of US$617.0k, 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. 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. For example Lion Copper and Gold has 6 warning signs (and 4 which shouldn't be ignored) we think you should know about.

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.