Is OZ Minerals (ASX:OZL) A Risky Investment?
Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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.
What Risk Does Debt Bring?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for OZ Minerals
What Is OZ Minerals's Debt?
The image below, which you can click on for greater detail, shows that at June 2020 OZ Minerals had debt of AU$100.0m, up from AU$3.70m in one year. But it also has AU$114.5m in cash to offset that, meaning it has AU$14.5m net cash.
How Healthy Is OZ Minerals's Balance Sheet?
We can see from the most recent balance sheet that OZ Minerals had liabilities of AU$385.6m falling due within a year, and liabilities of AU$624.1m due beyond that. Offsetting these obligations, it had cash of AU$114.5m as well as receivables valued at AU$172.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$722.4m.
Of course, OZ Minerals has a market capitalization of AU$4.74b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, OZ Minerals also has more cash than debt, so we're pretty confident it can manage its debt safely.
On top of that, OZ Minerals grew its EBIT by 42% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. 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. Over the last three years, OZ Minerals saw substantial negative free cash flow, in total. 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$14.5m. And it impressed us with its EBIT growth of 42% over the last year. So we are not troubled with OZ Minerals's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for OZ Minerals that you should be aware of before investing here.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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.
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