Horizonte Minerals (LON:HZM) Has Debt But No Earnings; Should You Worry?

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. As with many other companies Horizonte Minerals Plc (LON:HZM) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Horizonte Minerals

How Much Debt Does Horizonte Minerals Carry?

The image below, which you can click on for greater detail, shows that at March 2022 Horizonte Minerals had debt of US$136.1m, up from US$32.1m in one year. However, its balance sheet shows it holds US$251.8m in cash, so it actually has US$115.7m net cash.

How Strong Is Horizonte Minerals' Balance Sheet?

According to the last reported balance sheet, Horizonte Minerals had liabilities of US$15.3m due within 12 months, and liabilities of US$148.6m due beyond 12 months. Offsetting these obligations, it had cash of US$251.8m as well as receivables valued at US$18.3m due within 12 months. So it actually has US$106.1m more liquid assets than total liabilities.

This excess liquidity is a great indication that Horizonte Minerals' balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Horizonte Minerals boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. 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.

So How Risky Is Horizonte Minerals?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Horizonte Minerals had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$63m of cash and made a loss of US$6.8m. But at least it has US$115.7m on the balance sheet to spend on growth, near-term. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. Be aware that Horizonte Minerals is showing 4 warning signs in our investment analysis , and 2 of those are potentially serious...

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.