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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Brockman Mining Limited (HKG:159) does have debt on its balance sheet. But is this debt a concern to shareholders?
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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Brockman Mining
How Much Debt Does Brockman Mining Carry?
You can click the graphic below for the historical numbers, but it shows that as of December 2024 Brockman Mining had HK$86.2m of debt, an increase on HK$65.5m, over one year. On the flip side, it has HK$2.04m in cash leading to net debt of about HK$84.2m.
How Healthy Is Brockman Mining's Balance Sheet?
We can see from the most recent balance sheet that Brockman Mining had liabilities of HK$2.35m falling due within a year, and liabilities of HK$216.3m due beyond that. Offsetting these obligations, it had cash of HK$2.04m as well as receivables valued at HK$1.56m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$215.0m.
Brockman Mining has a market capitalization of HK$928.0m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Brockman Mining's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Given its lack of meaningful operating revenue, investors are probably hoping that Brockman Mining finds some valuable resources, before it runs out of money.
Caveat Emptor
Over the last twelve months Brockman Mining produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at HK$26m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled HK$19m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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 instance, we've identified 3 warning signs for Brockman Mining that 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.