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Here's Why OZ Minerals (ASX:OZL) Can Manage Its Debt Responsibly

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Simply Wall St
·4 min read
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Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. As with many other companies OZ Minerals Limited (ASX:OZL) makes use of debt. But the real question is whether this debt is making the company risky.

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for OZ Minerals

How Much Debt Does OZ Minerals Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 OZ Minerals had AU$100.0m of debt, an increase on none, over one year. However, its balance sheet shows it holds AU$131.7m in cash, so it actually has AU$31.7m net cash.

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

How Strong Is OZ Minerals' Balance Sheet?

According to the last reported balance sheet, OZ Minerals had liabilities of AU$446.9m due within 12 months, and liabilities of AU$1.10b due beyond 12 months. On the other hand, it had cash of AU$131.7m and AU$173.8m worth of receivables due within a year. So its liabilities total AU$1.24b more than the combination of its cash and short-term receivables.

Of course, OZ Minerals has a market capitalization of AU$7.02b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, OZ Minerals boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that OZ Minerals has boosted its EBIT by 48%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if OZ Minerals can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. OZ Minerals may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, OZ Minerals burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

Although OZ Minerals's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of AU$31.7m. And it impressed us with its EBIT growth of 48% over the last year. So we don't have any problem with OZ Minerals's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for OZ Minerals you should know about.

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. 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.