Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Brockman Mining Limited (HKG:159) does carry debt. But should shareholders be worried about its use of debt?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
What Is Brockman Mining's Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2023 Brockman Mining had HK$64.6m of debt, an increase on HK$51.3m, over one year. On the flip side, it has HK$16.5m in cash leading to net debt of about HK$48.1m.
How Strong Is Brockman Mining's Balance Sheet?
The latest balance sheet data shows that Brockman Mining had liabilities of HK$61.9m due within a year, and liabilities of HK$151.7m falling due after that. On the other hand, it had cash of HK$16.5m and HK$52.0k worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$197.1m.
Since publicly traded Brockman Mining shares are worth a total of HK$1.32b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Brockman Mining 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.
Since Brockman Mining has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.
Over the last twelve months Brockman Mining produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at HK$67m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled HK$19m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Brockman Mining that you should be aware of.
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.