Is O3 Mining (CVE:OIII) Weighed On By Its Debt Load?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 note that O3 Mining Inc. (CVE:OIII) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

View our latest analysis for O3 Mining

What Is O3 Mining's Net Debt?

As you can see below, at the end of June 2023, O3 Mining had CA$6.02m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has CA$22.3m in cash, leading to a CA$16.3m net cash position.

A Look At O3 Mining's Liabilities

According to the last reported balance sheet, O3 Mining had liabilities of CA$2.99m due within 12 months, and liabilities of CA$32.6m due beyond 12 months. Offsetting this, it had CA$22.3m in cash and CA$2.61m in receivables that were due within 12 months. So its liabilities total CA$10.7m more than the combination of its cash and short-term receivables.

Of course, O3 Mining has a market capitalization of CA$113.5m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, O3 Mining boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. 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.

Given its lack of meaningful operating revenue, investors are probably hoping that O3 Mining finds some valuable resources, before it runs out of money.

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$33m and booked a CA$3.5m accounting loss. But at least it has CA$16.3m on the balance sheet to spend on growth, near-term. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. For example, we've discovered 2 warning signs for O3 Mining (1 is potentially serious!) that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.