Is Phoenix Copper (LON:PXC) A Risky Investment?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Phoenix Copper Limited (LON:PXC) does carry 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Phoenix Copper

How Much Debt Does Phoenix Copper Carry?

As you can see below, at the end of June 2021, Phoenix Copper had US$2.91m of debt, up from US$929.0k a year ago. Click the image for more detail. But it also has US$22.9m in cash to offset that, meaning it has US$20.0m net cash.

How Strong Is Phoenix Copper's Balance Sheet?

According to the last reported balance sheet, Phoenix Copper had liabilities of US$3.53m due within 12 months, and liabilities of US$757.7k due beyond 12 months. Offsetting these obligations, it had cash of US$22.9m as well as receivables valued at US$88.8k due within 12 months. So it can boast US$18.7m more liquid assets than total liabilities.

This surplus suggests that Phoenix Copper is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Phoenix Copper 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 it is future earnings, more than anything, that will determine Phoenix Copper'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 Phoenix Copper finds some valuable resources, before it runs out of money.

So How Risky Is Phoenix Copper?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Phoenix Copper had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$5.1m and booked a US$581k accounting loss. Given it only has net cash of US$20.0m, 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for Phoenix Copper (3 are a bit concerning) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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