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.' 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 Excelsior Mining Corp. (TSE:MIN) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Excelsior Mining

How Much Debt Does Excelsior Mining Carry?

As you can see below, Excelsior Mining had US$15.3m of debt at September 2021, down from US$16.3m a year prior. However, it does have US$24.5m in cash offsetting this, leading to net cash of US$9.19m.

How Strong Is Excelsior Mining's Balance Sheet?

The latest balance sheet data shows that Excelsior Mining had liabilities of US$20.6m due within a year, and liabilities of US$118.8m falling due after that. On the other hand, it had cash of US$24.5m and US$287.0k worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$114.6m.

Given this deficit is actually higher than the company's market capitalization of US$92.4m, we think shareholders really should watch Excelsior Mining's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. Given that Excelsior Mining has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total. 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 Excelsior Mining 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.

Given its lack of meaningful operating revenue, investors are probably hoping that Excelsior Mining finds some valuable resources, before it runs out of money.

So How Risky Is Excelsior Mining?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Excelsior Mining lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$17m and booked a US$29m accounting loss. Given it only has net cash of US$9.19m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 5 warning signs for Excelsior Mining (2 are potentially serious!) that you should be aware of before investing here.

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.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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