Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. We can see that Copper Mountain Mining Company (TSE: CMMC) uses debt in its operations. But should shareholders be concerned about its use of debt?
When is debt dangerous?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, many companies use debt to finance their growth without negative consequences. When we look at debt levels, we first look at cash and debt levels together.
Check out our latest review for Copper Mountain Mining
How much debt does Copper Mountain Mining have?
You can click on the graph below for historical numbers, but it shows Copper Mountain Mining had C $ 302.6 million in debt in March 2021, up from C $ 350.2 million a year earlier. However, he also had C $ 137.1 million in cash, so his net debt is C $ 165.5 million.
A look at the liabilities of Copper Mountain Mining
The most recent balance sheet shows that Copper Mountain Mining had a liability of C $ 128.6 million maturing within one year and a liability of C $ 339.9 million beyond. In return, he had CA $ 137.1 million in cash and CA $ 44.4 million in receivables due within 12 months. Its liabilities therefore total C $ 287.1 million more than the combination of its cash and short-term receivables.
Copper Mountain Mining has a market cap of C $ 800.8 million, so it could most likely raise funds to improve its balance sheet, should the need arise. But we absolutely want to keep our eyes open for indications that its debt is too risky.
In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
Copper Mountain Mining has a low net debt to EBITDA ratio of just 0.78. And its EBIT covers its interest costs 14.2 times more. So we’re pretty relaxed about its ultra-conservative use of debt. It was also good to see that despite losing money on the EBIT line last year, Copper Mountain Mining has been a game changer over the past 12 months, delivering EBIT of C $ 188 million. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether 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 analyst earnings forecast report interesting.
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) are converted into actual free cash flow. In the most recent year, Copper Mountain Mining recorded free cash flow of 75% 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 it can manage its debt as easily as Cristiano Ronaldo could score a goal against an Under-14 keeper. And the good news does not end there, since its conversion of EBIT into free cash flow also confirms this impression! Given 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. However, not all investment risks lie on the balance sheet – far from it. For example, we discovered 4 warning signs for Copper Mountain Mining which you should know before investing here.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash-flow-growing stocks today.
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