Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 FPX Nickel Corp. (CVE:FPX) makes use of debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
What Is FPX Nickel's Debt?
You can click the graphic below for the historical numbers, but it shows that as of March 2019 FPX Nickel had CA$7.85m of debt, an increase on CA$7.12m, over one year. On the flip side, it has CA$1.17m in cash leading to net debt of about CA$6.68m.
How Healthy Is FPX Nickel's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that FPX Nickel had liabilities of CA$159.4k due within 12 months and liabilities of CA$7.85m due beyond that. Offsetting this, it had CA$1.17m in cash and CA$52.8k in receivables that were due within 12 months. So it has liabilities totalling CA$6.79m more than its cash and near-term receivables, combined.
FPX Nickel has a market capitalization of CA$19.0m, 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. There's no doubt that we learn most about debt from the balance sheet. But it is FPX Nickel'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 FPX Nickel finds some valuable resources, before it runs out of money.
Over the last twelve months FPX Nickel produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CA$912k at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CA$519k in negative free cash flow over the last twelve months. So to be blunt we think it is risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how FPX Nickel's profit, revenue, and operating cashflow have changed over the last few years.
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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