Is Horizonte Minerals (LON:HZM) Weighed On By Its Debt Load?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Horizonte Minerals Plc (LON:HZM) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Horizonte Minerals

What Is Horizonte Minerals's Net Debt?

As you can see below, at the end of June 2022, Horizonte Minerals had US$140.0m of debt, up from US$34.5m a year ago. Click the image for more detail. But on the other hand it also has US$199.0m in cash, leading to a US$59.0m net cash position.

How Healthy Is Horizonte Minerals' Balance Sheet?

According to the last reported balance sheet, Horizonte Minerals had liabilities of US$21.7m due within 12 months, and liabilities of US$153.3m due beyond 12 months. Offsetting this, it had US$199.0m in cash and US$20.0m in receivables that were due within 12 months. So it can boast US$44.0m more liquid assets than total liabilities.

This surplus suggests that Horizonte Minerals is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Horizonte Minerals has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Horizonte Minerals's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

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$97m of cash and made a loss of US$4.7m. However, it has net cash of US$59.0m, so it has a bit of time before it will need more capital. 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. For instance, we've identified 4 warning signs for Horizonte Minerals that 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.