Is Ucore Rare Metals (CVE:UCU) Using Debt Sensibly?

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 Ucore Rare Metals Inc. (CVE:UCU) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Ucore Rare Metals

What Is Ucore Rare Metals's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Ucore Rare Metals had CA$2.93m of debt, an increase on CA$2.75m, over one year. However, its balance sheet shows it holds CA$4.66m in cash, so it actually has CA$1.72m net cash.

How Healthy Is Ucore Rare Metals' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Ucore Rare Metals had liabilities of CA$2.21m due within 12 months and liabilities of CA$1.83m due beyond that. On the other hand, it had cash of CA$4.66m and CA$457.3k worth of receivables due within a year. So it actually has CA$1.07m more liquid assets than total liabilities.

This state of affairs indicates that Ucore Rare Metals' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CA$58.4m company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Ucore Rare Metals 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 you can't view debt in total isolation; since Ucore Rare Metals 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 Ucore Rare Metals finds some valuable resources, before it runs out of money.

So How Risky Is Ucore Rare Metals?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Ucore Rare Metals had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CA$5.3m and booked a CA$5.9m accounting loss. Given it only has net cash of CA$1.72m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. Case in point: We've spotted 6 warning signs for Ucore Rare Metals you should be aware of, and 3 of them are potentially serious.

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.