Is Technology Minerals (LON:TM1) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Technology Minerals Plc (LON:TM1) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Technology Minerals

What Is Technology Minerals's Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Technology Minerals had debt of UK£3.61m, up from UK£1.56m in one year. Net debt is about the same, since the it doesn't have much cash.

A Look At Technology Minerals' Liabilities

The latest balance sheet data shows that Technology Minerals had liabilities of UK£4.63m due within a year, and liabilities of UK£3.59m falling due after that. Offsetting these obligations, it had cash of UK£15.0k as well as receivables valued at UK£412.0k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£7.79m.

The deficiency here weighs heavily on the UK£4.78m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Technology Minerals would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Technology Minerals will need earnings to service that debt. 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.

Given its lack of meaningful operating revenue, investors are probably hoping that Technology Minerals finds some valuable resources, before it runs out of money.

Caveat Emptor

Over the last twelve months Technology Minerals produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable UK£3.2m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through UK£2.2m in negative free cash flow over the last year. That means it's on the risky side of things. 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 Technology Minerals is showing 5 warning signs in our investment analysis , and 4 of those are a bit concerning...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.