Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that BCI Minerals Limited (ASX:BCI) 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 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for BCI Minerals

What Is BCI Minerals's Debt?

As you can see below, at the end of December 2021, BCI Minerals had AU$18.5m of debt, up from none a year ago. Click the image for more detail. But it also has AU$334.8m in cash to offset that, meaning it has AU$316.3m net cash. debt-equity-history-analysis

How Strong Is BCI Minerals' Balance Sheet?

We can see from the most recent balance sheet that BCI Minerals had liabilities of AU$30.6m falling due within a year, and liabilities of AU$35.0m due beyond that. Offsetting these obligations, it had cash of AU$334.8m as well as receivables valued at AU$2.07m due within 12 months. So it can boast AU$271.2m more liquid assets than total liabilities.

This surplus liquidity suggests that BCI Minerals' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, BCI Minerals boasts net cash, so it's fair to say it does not have a heavy debt load!



Although BCI Minerals made a loss at the EBIT level, last year, it was also good to see that it generated AU$16m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine BCI Minerals's ability to maintain a healthy balance sheet going forward. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While BCI Minerals 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 year, BCI Minerals reported free cash flow worth 6.4% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that BCI Minerals has net cash of AU$316.3m, as well as more liquid assets than liabilities. So is BCI Minerals's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted  2 warning signs for BCI Minerals  you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this freelist 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.