Is Beowulf Mining (LON:BEM) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Beowulf Mining plc (LON:BEM) 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 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. 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.

See our latest analysis for Beowulf Mining

How Much Debt Does Beowulf Mining Carry?

The image below, which you can click on for greater detail, shows that at September 2022 Beowulf Mining had debt of UK£1.72m, up from none in one year. But it also has UK£2.76m in cash to offset that, meaning it has UK£1.04m net cash.

How Healthy Is Beowulf Mining's Balance Sheet?

According to the balance sheet data, Beowulf Mining had liabilities of UK£1.98m due within 12 months, but no longer term liabilities. On the other hand, it had cash of UK£2.76m and UK£150.1k worth of receivables due within a year. So it can boast UK£927.5k more liquid assets than total liabilities.

This short term liquidity is a sign that Beowulf Mining could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Beowulf Mining 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 it is Beowulf Mining'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 Beowulf Mining finds some valuable resources, before it runs out of money.

So How Risky Is Beowulf Mining?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Beowulf Mining had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of UK£2.4m and booked a UK£1.5m accounting loss. Given it only has net cash of UK£1.04m, 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. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Beowulf Mining you should be aware of, and 2 of them are concerning.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.