Yahoo Finance Is Flinders Mines (ASX:FMS) Using Debt In A Risky Way?
The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Flinders Mines Limited (ASX:FMS) does use debt in its business. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Flinders Mines
What Is Flinders Mines's Net Debt?
As you can see below, Flinders Mines had AU$3.19m of debt, at December 2021, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has AU$5.86m in cash, leading to a AU$2.67m net cash position.
How Healthy Is Flinders Mines' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Flinders Mines had liabilities of AU$6.64m due within 12 months and no liabilities due beyond that. Offsetting this, it had AU$5.86m in cash and AU$98.0k in receivables that were due within 12 months. So it has liabilities totalling AU$689.0k more than its cash and near-term receivables, combined.
Having regard to Flinders Mines' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the AU$81.0m company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Flinders Mines boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Flinders Mines's earnings that will influence how the balance sheet holds up in the future. 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 Flinders Mines finds some valuable resources, before it runs out of money.
So How Risky Is Flinders Mines?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Flinders Mines 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 AU$9.6m and booked a AU$3.7m accounting loss. Given it only has net cash of AU$2.67m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. 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 5 warning signs for Flinders Mines (of which 3 are a bit concerning!) you should know about.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.
