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IsoEnergy (CVE:ISO) Has Debt But No Earnings; Should You Worry?

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  • ISENF

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.' 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, IsoEnergy Ltd. (CVE:ISO) does carry debt. But the more important question is: how much risk is that debt creating?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Check out our latest analysis for IsoEnergy

How Much Debt Does IsoEnergy Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 IsoEnergy had CA$22.4m of debt, an increase on CA$6.59m, over one year. But it also has CA$24.8m in cash to offset that, meaning it has CA$2.47m net cash.

debt-equity-history-analysis
debt-equity-history-analysis

How Strong Is IsoEnergy's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that IsoEnergy had liabilities of CA$2.61m due within 12 months and liabilities of CA$25.1m due beyond that. Offsetting this, it had CA$24.8m in cash and CA$229.9k in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$2.70m.

This state of affairs indicates that IsoEnergy's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CA$548.1m company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, IsoEnergy boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine IsoEnergy's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Given its lack of meaningful operating revenue, IsoEnergy shareholders no doubt hope it can fund itself until it can sell some combustibles.

So How Risky Is IsoEnergy?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months IsoEnergy lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CA$6.3m and booked a CA$19m accounting loss. With only CA$2.47m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. Case in point: We've spotted 5 warning signs for IsoEnergy you should be aware of, and 2 of them don't sit too well with us.

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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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