Hycroft Mining Holding (NASDAQ:HYMC) Is Making Moderate Use Of 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Hycroft Mining Holding Corporation (NASDAQ:HYMC) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Hycroft Mining Holding

What Is Hycroft Mining Holding's Net Debt?

The image below, which you can click on for greater detail, shows that Hycroft Mining Holding had debt of US$147.8m at the end of December 2020, a reduction from US$554.0m over a year. However, it does have US$56.4m in cash offsetting this, leading to net debt of about US$91.4m.

How Healthy Is Hycroft Mining Holding's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hycroft Mining Holding had liabilities of US$21.7m due within 12 months and liabilities of US$179.0m due beyond that. Offsetting these obligations, it had cash of US$56.4m as well as receivables valued at US$426.0k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$143.9m.

Hycroft Mining Holding has a market capitalization of US$415.8m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Hycroft Mining Holding can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Hycroft Mining Holding reported revenue of US$47m, which is a gain of 240%, 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!

Caveat Emptor

Despite the top line growth, Hycroft Mining Holding still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable US$84m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$144m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very 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. Case in point: We've spotted 2 warning signs for Hycroft Mining Holding you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. 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.
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