Is Rambler Metals and Mining (LON:RMM) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Rambler Metals and Mining Plc (LON:RMM) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Rambler Metals and Mining

What Is Rambler Metals and Mining's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Rambler Metals and Mining had US$29.8m of debt, an increase on US$12.0m, over one year. However, it also had US$1.46m in cash, and so its net debt is US$28.3m.

How Healthy Is Rambler Metals and Mining's Balance Sheet?

According to the last reported balance sheet, Rambler Metals and Mining had liabilities of US$28.5m due within 12 months, and liabilities of US$24.6m due beyond 12 months. On the other hand, it had cash of US$1.46m and US$1.58m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$50.1m.

Given Rambler Metals and Mining has a market capitalization of US$863.4m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Rambler Metals and Mining's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Rambler Metals and Mining wasn't profitable at an EBIT level, but managed to grow its revenue by 61%, to US$40m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though Rambler Metals and Mining managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at US$24m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$24m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example Rambler Metals and Mining has 4 warning signs (and 3 which are significant) we think you should know about.

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.