Does Horizonte Minerals (LON:HZM) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Horizonte Minerals Plc (LON:HZM) 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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Horizonte Minerals

What Is Horizonte Minerals's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 Horizonte Minerals had UK£25.0m of debt, an increase on UK£23.7m, over one year. On the flip side, it has UK£22.2m in cash leading to net debt of about UK£2.80m.

How Strong Is Horizonte Minerals' Balance Sheet?

According to the last reported balance sheet, Horizonte Minerals had liabilities of UK£3.82m due within 12 months, and liabilities of UK£31.0m due beyond 12 months. Offsetting this, it had UK£22.2m in cash and UK£498.2k in receivables that were due within 12 months. So it has liabilities totalling UK£12.2m more than its cash and near-term receivables, combined.

Since publicly traded Horizonte Minerals shares are worth a total of UK£122.4m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Horizonte Minerals can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Given its lack of meaningful operating revenue, investors are probably hoping that Horizonte Minerals finds some valuable resources, before it runs out of money.

Caveat Emptor

Over the last twelve months Horizonte Minerals produced an earnings before interest and tax (EBIT) loss. Indeed, it lost UK£4.0m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled UK£5.8m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be 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. To that end, you should learn about the 5 warning signs we've spotted with Horizonte Minerals (including 2 which don't sit too well with us) .

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.
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