Is Lion One Metals (CVE:LIO) 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Lion One Metals Limited (CVE:LIO) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Lion One Metals

What Is Lion One Metals's Debt?

As you can see below, at the end of June 2023, Lion One Metals had CA$25.3m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds CA$45.4m in cash, so it actually has CA$20.0m net cash.

How Healthy Is Lion One Metals' Balance Sheet?

According to the last reported balance sheet, Lion One Metals had liabilities of CA$5.01m due within 12 months, and liabilities of CA$28.1m due beyond 12 months. Offsetting these obligations, it had cash of CA$45.4m as well as receivables valued at CA$3.74m due within 12 months. So it can boast CA$16.1m more liquid assets than total liabilities.

This short term liquidity is a sign that Lion One Metals could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Lion One Metals 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 future earnings, more than anything, that will determine Lion One Metals's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Since Lion One Metals has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.

So How Risky Is Lion One Metals?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Lion One Metals lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CA$46m of cash and made a loss of CA$2.9m. However, it has net cash of CA$20.0m, so it has a bit of time before it will need more capital. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for Lion One Metals (3 are a bit concerning) you should be aware of.

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.