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.' 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. We can see that Phoenix Copper Limited (LON:PXC) does use debt in its business. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Phoenix Copper
What Is Phoenix Copper's Debt?
The image below, which you can click on for greater detail, shows that at June 2024 Phoenix Copper had debt of US$6.82m, up from US$2.00m in one year. However, because it has a cash reserve of US$2.72m, its net debt is less, at about US$4.10m.
How Strong Is Phoenix Copper's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Phoenix Copper had liabilities of US$2.83m due within 12 months and liabilities of US$4.80m due beyond that. Offsetting this, it had US$2.72m in cash and US$11.0m in receivables that were due within 12 months. So it actually has US$6.08m more liquid assets than total liabilities.
It's good to see that Phoenix Copper has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Phoenix Copper can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Since Phoenix Copper has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.
Caveat Emptor
Over the last twelve months Phoenix Copper produced an earnings before interest and tax (EBIT) loss. Indeed, it lost US$2.1m at the EBIT level. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. This one is a bit too risky for our liking. 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. We've identified 6 warning signs with Phoenix Copper (at least 4 which make us uncomfortable) , and understanding them should be part of your investment process.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.
About AIM:PXC
Phoenix Copper
Engages in the exploration and mining activities for precious and base metals primarily in North America.
Medium-low with mediocre balance sheet.
