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

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.' 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. We note that Ucore Rare Metals Inc. (CVE:UCU) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 think about a company's use of debt, we first look at cash and debt together.

View 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 June 2024 Ucore Rare Metals had CA$10.7m of debt, an increase on CA$5.11m, over one year. However, it does have CA$683.2k in cash offsetting this, leading to net debt of about CA$10.0m.

A Look At Ucore Rare Metals' Liabilities

The latest balance sheet data shows that Ucore Rare Metals had liabilities of CA$3.90m due within a year, and liabilities of CA$13.5m falling due after that. On the other hand, it had cash of CA$683.2k and CA$574.0k worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$16.2m.

This deficit isn't so bad because Ucore Rare Metals is worth CA$35.3m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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.

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

Importantly, Ucore Rare Metals had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping CA$9.6m. 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$10m of cash over the last year. So suffice it to say we consider the stock very risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Ucore Rare Metals (of which 3 don't sit too well with us!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.