Is Panoro Minerals (CVE:PML) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Panoro Minerals Ltd. (CVE:PML) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Panoro Minerals

How Much Debt Does Panoro Minerals Carry?

As you can see below, at the end of September 2021, Panoro Minerals had CA$14.7m of debt, up from CA$13.3m a year ago. Click the image for more detail. However, because it has a cash reserve of CA$837.9k, its net debt is less, at about CA$13.8m.

How Healthy Is Panoro Minerals' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Panoro Minerals had liabilities of CA$13.7m due within 12 months and liabilities of CA$3.65m due beyond that. On the other hand, it had cash of CA$837.9k and CA$1.56m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$14.9m.

This deficit isn't so bad because Panoro Minerals is worth CA$42.3m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Panoro Minerals will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

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

Caveat Emptor

Over the last twelve months Panoro Minerals produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable CA$5.8m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CA$3.6m 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 5 warning signs for Panoro Minerals (3 make us uncomfortable) 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.