The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Luca Mining Corp. (CVE:LUCA) does have debt on its balance sheet. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for Luca Mining
What Is Luca Mining's Debt?
The image below, which you can click on for greater detail, shows that Luca Mining had debt of CA$35.0m at the end of March 2024, a reduction from CA$42.9m over a year. However, because it has a cash reserve of CA$3.49m, its net debt is less, at about CA$31.5m.
A Look At Luca Mining's Liabilities
Zooming in on the latest balance sheet data, we can see that Luca Mining had liabilities of CA$71.3m due within 12 months and liabilities of CA$18.4m due beyond that. Offsetting these obligations, it had cash of CA$3.49m as well as receivables valued at CA$12.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$73.7m.
This deficit is considerable relative to its market capitalization of CA$106.8m, so it does suggest shareholders should keep an eye on Luca Mining's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Luca Mining will need earnings to service that debt. 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.
Over 12 months, Luca Mining reported revenue of CA$72m, which is a gain of 10%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Caveat Emptor
Importantly, Luca Mining had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CA$6.9m. 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$17m of cash over the last year. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Luca Mining (1 is potentially serious) you should be aware of.
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.
About TSXV:LUCA
Luca Mining
Engages in the acquisition, exploration, and development of mineral resource properties in North America.
Low with imperfect balance sheet.