Yahoo Finance Copper Mountain Mining (TSE:CMMC) Use Of Debt Could Be Considered Risky
Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about. 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. As with many other companies Copper Mountain Mining Corporation (TSE:CMMC) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Copper Mountain Mining
What Is Copper Mountain Mining's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 Copper Mountain Mining had CA$320.6m of debt, an increase on CA$298.3m, over one year. However, it does have CA$43.9m in cash offsetting this, leading to net debt of about CA$276.7m.
A Look At Copper Mountain Mining's Liabilities
Zooming in on the latest balance sheet data, we can see that Copper Mountain Mining had liabilities of CA$173.8m due within 12 months and liabilities of CA$204.9m due beyond that. Offsetting these obligations, it had cash of CA$43.9m as well as receivables valued at CA$11.0m due within 12 months. So it has liabilities totalling CA$323.8m more than its cash and near-term receivables, combined.
The deficiency here weighs heavily on the CA$131.8m 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'd watch its balance sheet closely, without a doubt After all, Copper Mountain Mining would likely require a major re-capitalisation if it had to pay its creditors today.
We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.
Weak interest cover of 0.67 times and a disturbingly high net debt to EBITDA ratio of 6.0 hit our confidence in Copper Mountain Mining like a one-two punch to the gut. The debt burden here is substantial. Worse, Copper Mountain Mining's EBIT was down 80% over the last year. If earnings continue to follow that trajectory, paying off that debt load will be harder than convincing us to run a marathon in the rain. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Copper Mountain 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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Happily for any shareholders, Copper Mountain Mining actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Our View
To be frank both Copper Mountain Mining's EBIT growth rate and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. But at least it's pretty decent at converting EBIT to free cash flow; that's encouraging. Overall, it seems to us that Copper Mountain Mining's balance sheet is really quite a risk to the business. So we're almost as wary of this stock as a hungry kitten is about falling into its owner's fish pond: once bitten, twice shy, as they say. Given the risks around Copper Mountain Mining's use of debt, the sensible thing to do is to check if insiders have been unloading the stock.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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