Would Osisko Metals (CVE:OM) Be Better Off With Less Debt?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Osisko Metals Incorporated (CVE:OM) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Osisko Metals

What Is Osisko Metals's Debt?

As you can see below, at the end of June 2024, Osisko Metals had CA$35.9m of debt, up from none a year ago. Click the image for more detail. However, because it has a cash reserve of CA$5.06m, its net debt is less, at about CA$30.8m.

How Healthy Is Osisko Metals' Balance Sheet?

We can see from the most recent balance sheet that Osisko Metals had liabilities of CA$38.8m falling due within a year, and liabilities of CA$4.14m due beyond that. Offsetting these obligations, it had cash of CA$5.06m as well as receivables valued at CA$683.9k due within 12 months. So its liabilities total CA$37.2m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of CA$59.0m. 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 ultimately the future profitability of the business will decide if Osisko Metals can strengthen its balance sheet over time. 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 Osisko Metals finds some valuable resources, before it runs out of money.

Caveat Emptor

Over the last twelve months Osisko Metals produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CA$497k. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CA$8.1m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 4 warning signs with Osisko Metals (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.

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.