The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Taseko Mines Limited (TSE:TKO) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Taseko Mines Carry?
The chart below, which you can click on for greater detail, shows that Taseko Mines had CA$339.6m in debt in June 2019; about the same as the year before. However, it does have CA$42.7m in cash offsetting this, leading to net debt of about CA$296.9m.
A Look At Taseko Mines's Liabilities
According to the last reported balance sheet, Taseko Mines had liabilities of CA$58.9m due within 12 months, and liabilities of CA$567.3m due beyond 12 months. On the other hand, it had cash of CA$42.7m and CA$5.60m worth of receivables due within a year. So it has liabilities totalling CA$577.8m more than its cash and near-term receivables, combined.
The deficiency here weighs heavily on the CA$135.4m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Taseko Mines would probably need a major re-capitalization if its creditors were to demand repayment. 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 Taseko Mines 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.
In the last year Taseko Mines managed to grow its revenue by 3.0%, to CA$342m. We usually like to see faster growth from unprofitable companies, but each to their own.
Over the last twelve months Taseko Mines produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping CA$14m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely since it is low on liquid assets, and made a loss of-CA$31.6m in the last year. So we think this stock is quite risky, like eating chicken you think might look too pink. We'd prefer pass. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Taseko Mines insider transactions.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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