Here's Why Brockman Mining (HKG:159) Can Afford Some Debt

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.' 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 can see that Brockman Mining Limited (HKG:159) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Brockman Mining

How Much Debt Does Brockman Mining Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Brockman Mining had HK$75.8m of debt, an increase on HK$64.6m, over one year. However, because it has a cash reserve of HK$4.56m, its net debt is less, at about HK$71.2m.

How Healthy Is Brockman Mining's Balance Sheet?

We can see from the most recent balance sheet that Brockman Mining had liabilities of HK$2.48m falling due within a year, and liabilities of HK$212.3m due beyond that. Offsetting these obligations, it had cash of HK$4.56m as well as receivables valued at HK$63.0k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$210.2m.

Brockman Mining has a market capitalization of HK$1.00b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Brockman Mining will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

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

Caveat Emptor

Over the last twelve months Brockman Mining produced an earnings before interest and tax (EBIT) loss. Indeed, it lost HK$26m at the EBIT level. 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. However, it doesn't help that it burned through HK$19m of cash over the last year. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Brockman Mining (of which 3 are concerning!) you should know about.

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.

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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.