Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about. 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 Hampton Hill Mining NL (ASX:HHM) does use debt in its business. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Hampton Hill Mining's Debt?
The image below, which you can click on for greater detail, shows that Hampton Hill Mining had debt of AU$250.0k at the end of June 2019, a reduction from AU$500.0k over a year. However, it does have AU$3.87m in cash offsetting this, leading to net cash of AU$3.62m.
How Healthy Is Hampton Hill Mining's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Hampton Hill Mining had liabilities of AU$283.1k due within 12 months and no liabilities due beyond that. Offsetting this, it had AU$3.87m in cash and AU$15.3k in receivables that were due within 12 months. So it can boast AU$3.60m more liquid assets than total liabilities.
This luscious liquidity implies that Hampton Hill Mining's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. Simply put, the fact that Hampton Hill Mining has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Hampton Hill Mining will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Given its lack of meaningful operating revenue, investors are probably hoping that Hampton Hill Mining finds some valuable resources, before it runs out of money.
So How Risky Is Hampton Hill Mining?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Hampton Hill Mining had negative earnings before interest and tax (EBIT), over the last year. And over the same period it saw negative free cash outflow of AU$235k and booked a AU$1.7m accounting loss. Given it only has net cash of AU$3.62m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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 Hampton Hill Mining's profit, revenue, and operating cashflow have changed over the last few years.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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 email@example.com. 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.