Despite Lacking Profits Copperstone Resources (STO:COPP B) Seems To Be On Top Of Its Debt

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 Copperstone Resources AB (STO:COPP B) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Copperstone Resources

What Is Copperstone Resources's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 Copperstone Resources had kr16.0m of debt, an increase on kr9.10m, over one year. However, it does have kr305.7m in cash offsetting this, leading to net cash of kr289.7m.

How Healthy Is Copperstone Resources' Balance Sheet?

We can see from the most recent balance sheet that Copperstone Resources had liabilities of kr42.4m falling due within a year, and liabilities of kr31.1m due beyond that. Offsetting this, it had kr305.7m in cash and kr9.71m in receivables that were due within 12 months. So it actually has kr241.9m more liquid assets than total liabilities.

This excess liquidity suggests that Copperstone Resources is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Copperstone Resources boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Copperstone Resources can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Copperstone Resources reported revenue of kr143m, which is a gain of 210%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

So How Risky Is Copperstone Resources?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Copperstone Resources had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of kr161m and booked a kr15m accounting loss. With only kr289.7m on the balance sheet, it would appear that its going to need to raise capital again soon. The good news for shareholders is that Copperstone Resources has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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 3 warning signs with Copperstone Resources (at least 1 which is concerning) , and understanding them should be part of your investment process.

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.