Does O3 Mining (CVE:OIII) Have A Healthy Balance Sheet?

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.' 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 can see that O3 Mining Inc. (CVE:OIII) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for O3 Mining

What Is O3 Mining's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 O3 Mining had debt of CA$6.38m, up from none in one year. However, it does have CA$36.2m in cash offsetting this, leading to net cash of CA$29.8m.

A Look At O3 Mining's Liabilities

We can see from the most recent balance sheet that O3 Mining had liabilities of CA$6.63m falling due within a year, and liabilities of CA$28.6m due beyond that. Offsetting these obligations, it had cash of CA$36.2m as well as receivables valued at CA$1.04m due within 12 months. So it actually has CA$1.94m more liquid assets than total liabilities.

Having regard to O3 Mining's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CA$115.3m company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, O3 Mining boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine O3 Mining'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 O3 Mining has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.

So How Risky Is O3 Mining?

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 O3 Mining lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CA$26m and booked a CA$42m accounting loss. But at least it has CA$29.8m on the balance sheet to spend on growth, near-term. 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. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that O3 Mining is showing 4 warning signs in our investment analysis , and 2 of those are potentially serious...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.