Yahoo Finance Here's Why K92 Mining (CVE:KNT) Can Manage Its Debt Responsibly
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 K92 Mining Inc. (CVE:KNT) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for K92 Mining
What Is K92 Mining's Debt?
The image below, which you can click on for greater detail, shows that at June 2020 K92 Mining had debt of US$9.09m, up from US$2.53m in one year. But on the other hand it also has US$34.7m in cash, leading to a US$25.6m net cash position.
A Look At K92 Mining's Liabilities
According to the last reported balance sheet, K92 Mining had liabilities of US$25.6m due within 12 months, and liabilities of US$3.94m due beyond 12 months. On the other hand, it had cash of US$34.7m and US$23.8m worth of receivables due within a year. So it actually has US$29.0m more liquid assets than total liabilities.
This surplus suggests that K92 Mining has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that K92 Mining has more cash than debt is arguably a good indication that it can manage its debt safely.
On top of that, K92 Mining grew its EBIT by 85% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine K92 Mining'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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While K92 Mining has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, K92 Mining recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.
Summing up
While it is always sensible to investigate a company's debt, in this case K92 Mining has US$25.6m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 85% over the last year. So we don't have any problem with K92 Mining's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 4 warning signs for K92 Mining (1 is a bit concerning!) that you should be aware of before investing here.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
This article by Simply Wall St is general in nature. 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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