Horizonte Minerals (LON:HZM) has debt but no profit; Should you be worried?
Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Like many other companies Horizonte Minerals Plc (LON:HZM) uses debt. But the more important question is: what risk does this debt create?
When is debt a problem?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. The first thing to do when considering how much debt a business has is to look at its cash flow and debt together.
See our latest analysis for Horizonte Minerals
What is Horizonte Minerals debt?
The image below, which you can click on for more details, shows that in March 2022, Horizonte Minerals had a debt of $136.1 million, compared to $32.1 million in one year. However, his balance sheet shows that he holds $251.8 million in cash, so he actually has $115.7 million in net cash.
How strong is Horizonte Minerals’ balance sheet?
According to the last published balance sheet, Horizonte Minerals had liabilities of US$15.3 million due within 12 months and liabilities of US$148.6 million due beyond 12 months. In compensation for these obligations, it had cash of US$251.8 million as well as receivables valued at US$18.3 million and maturing within 12 months. So he actually has US$106.1 million After liquid assets than total liabilities.
This excess liquidity is an excellent indication that Horizonte Minerals’ balance sheet is almost as strong as Fort Knox’s. With that in mind, one could argue that its track record means the company is capable of dealing with some adversity. In short, Horizonte Minerals has a net cash position, so it’s fair to say that they don’t have a lot of debt! When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Horizonte Minerals can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Given its lack of significant operating revenue, investors are likely hoping Horizonte Minerals finds valuable resources before it runs out of money.
So how risky is Horizonte Minerals?
Statistically speaking, businesses that lose money are riskier than those that make money. And we note that Horizonte Minerals recorded a loss in earnings before interest and taxes (EBIT) over the past year. Indeed, during this period, it burned through $63 million in cash and suffered a loss of $6.8 million. But at least it has $115.7 million on the balance sheet to spend on near-term growth. Even if its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company does not produce free cash flow regularly. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. Know that Horizonte Minerals shows 4 warning signs in our investment analysis and 2 of them are potentially serious…
Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.