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

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Ucore Rare Metals Inc. (CVE:UCU) does carry debt. 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 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 Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Ucore Rare Metals had debt of CA$5.31m, up from CA$4.83m in one year. However, it does have CA$993.3k in cash offsetting this, leading to net debt of about CA$4.32m.

How Healthy Is Ucore Rare Metals' Balance Sheet?

The latest balance sheet data shows that Ucore Rare Metals had liabilities of CA$6.27m due within a year, and liabilities of CA$1.03m falling due after that. Offsetting these obligations, it had cash of CA$993.3k as well as receivables valued at CA$494.6k due within 12 months. So its liabilities total CA$5.82m more than the combination of its cash and short-term receivables.

Given Ucore Rare Metals has a market capitalization of CA$42.7m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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 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.

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$5.0m. 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. However, it doesn't help that it burned through CA$9.2m of cash over the last year. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for Ucore Rare Metals (2 are a bit concerning) you should be aware of.

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.