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. As with many other companies Coro Mining Corp. (TSE:COP) makes use of debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Coro Mining's Debt?
You can click the graphic below for the historical numbers, but it shows that as of March 2019 Coro Mining had US$20.9m of debt, an increase on US$8.47m, over one year. However, it does have US$15.6m in cash offsetting this, leading to net debt of about US$5.21m.
How Healthy Is Coro Mining's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Coro Mining had liabilities of US$25.3m due within 12 months and liabilities of US$5.17m due beyond that. Offsetting this, it had US$15.6m in cash and US$3.22m in receivables that were due within 12 months. So its liabilities total US$11.6m more than the combination of its cash and short-term receivables.
Given Coro Mining has a market capitalization of US$110.7m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Coro Mining'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, investors are probably hoping that Coro Mining finds some valuable resources, before it runs out of money.
Importantly, Coro Mining had negative earnings before interest and tax (EBIT), over the last year. Its EBIT loss was a whopping US$11m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled US$34m in negative free cash flow over the last twelve months. So in short it's a really risky stock. For riskier companies like Coro Mining I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.