Does Ucore Rare Metals (CVE:UCU) Have A Healthy Balance Sheet?

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.' 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. As with many other companies Ucore Rare Metals Inc. (CVE:UCU) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Ucore Rare Metals

What Is Ucore Rare Metals's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Ucore Rare Metals had CA$2.39m of debt in March 2022, down from CA$2.89m, one year before. However, it does have CA$1.80m in cash offsetting this, leading to net debt of about CA$587.0k.

How Healthy Is Ucore Rare Metals' Balance Sheet?

The latest balance sheet data shows that Ucore Rare Metals had liabilities of CA$513.2k due within a year, and liabilities of CA$2.45m falling due after that. On the other hand, it had cash of CA$1.80m and CA$153.2k worth of receivables due within a year. So its liabilities total CA$1.01m more than the combination of its cash and short-term receivables.

Of course, Ucore Rare Metals has a market capitalization of CA$46.6m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. But either way, Ucore Rare Metals has virtually no net debt, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Ucore Rare Metals's earnings that will influence how the balance sheet holds up in the future. 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.

Since Ucore Rare Metals has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.

Caveat Emptor

Over the last twelve months Ucore Rare Metals produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping CA$5.3m. 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. Another cause for caution is that is bled CA$5.9m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 4 warning signs we've spotted with Ucore Rare Metals (including 3 which are a bit concerning) .

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.