David Iben put it well when he said: âVolatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. We can see that Copper Mountain Mining Company (TSE: CMMC) uses debt in its operations. But the real question is whether this debt makes the business risky.
When Is Debt a Problem?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we look at debt levels, we first consider both liquidity and debt levels.
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How much debt does Copper Mountain Mining have?
The image below, which you can click for more details, shows that in June 2021, Copper Mountain Mining had a debt of C $ 335.2 million, compared to C $ 200.5 million in one year. . However, he also had CA $ 144.5 million in cash, so his net debt is CA $ 190.8 million.
How healthy is Copper Mountain Mining’s balance sheet?
According to the latest published balance sheet, Copper Mountain Mining had liabilities of C $ 120.1 million due within 12 months and liabilities of C $ 419.5 million due beyond 12 months. On the other hand, it had C $ 144.5 million in cash and C $ 33.9 million in receivables due within one year. It therefore has liabilities totaling C $ 361.2 million more than its combined cash and short-term receivables.
Copper Mountain Mining has a market cap of C $ 745.1 million, so it could very likely raise funds to improve its balance sheet, should the need arise. But it is clear that it is absolutely necessary to take a close look at whether it can manage its debt without dilution.
We measure a company’s debt load relative to its earning capacity by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT) covers its interest costs (interest coverage). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
Copper Mountain Mining has a low net debt to EBITDA ratio of just 0.72. And its EBIT covers its interest costs a whopping 12.4 times. We could therefore say that he is no more threatened by his debt than an elephant is by a mouse. Although Copper Mountain Mining recorded an EBIT loss last year, it was also good to see that it generated an EBIT of C $ 242 million in the last twelve months. The balance sheet is clearly the area you need to focus on when analyzing debt. But it is future profits, more than anything, that will determine Copper Mountain Mining’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. It is therefore important to check to what extent its earnings before interest and taxes (EBIT) translate into actual free cash flow. In the most recent year, Copper Mountain Mining recorded free cash flow of 79% of its EBIT, which is close to normal given that free cash flow excludes interest and taxes. This hard cash allows him to reduce his debt whenever he wants.
Our point of view
Copper Mountain Mining’s interest coverage suggests they can manage their debt as easily as Cristiano Ronaldo could score a goal against an Under-14 keeper. But, on a darker note, we’re a little concerned with its total liability level. Considering all of this data, it seems to us that Copper Mountain Mining is taking a fairly reasonable approach to debt. This means that they are taking a bit more risk, in the hope of increasing returns for shareholders. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. To do this, you need to know the 3 warning signs we spotted with Copper Mountain Mining.
At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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