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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 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 note that Ur-Energy Inc. (TSE:URE) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Ur-Energy Carry?
The image below, which you can click on for greater detail, shows that Ur-Energy had debt of US$12.3m at the end of March 2022, a reduction from US$13.2m over a year. But on the other hand it also has US$46.3m in cash, leading to a US$34.0m net cash position.
A Look At Ur-Energy's Liabilities
We can see from the most recent balance sheet that Ur-Energy had liabilities of US$9.33m falling due within a year, and liabilities of US$46.0m due beyond that. On the other hand, it had cash of US$46.3m and US$6.0k worth of receivables due within a year. So its liabilities total US$8.98m more than the combination of its cash and short-term receivables.
Of course, Ur-Energy has a market capitalization of US$240.6m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Ur-Energy boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Ur-Energy's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Since Ur-Energy doesn't have significant operating revenue, shareholders must hope it'll sell some fossil fuels, before it runs out of money.
So How Risky Is Ur-Energy?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Ur-Energy had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$13m and booked a US$22m accounting loss. Given it only has net cash of US$34.0m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for Ur-Energy (2 shouldn't be ignored) you should be aware of.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.