David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, Flinders Mines Limited (ASX:FMS) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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.

View our latest analysis for Flinders Mines

What Is Flinders Mines's Debt?

The chart below, which you can click on for greater detail, shows that Flinders Mines had AU$3.12m in debt in June 2020; about the same as the year before. However, its balance sheet shows it holds AU$4.10m in cash, so it actually has AU$979.0k net cash.

A Look At Flinders Mines's Liabilities

The latest balance sheet data shows that Flinders Mines had liabilities of AU$587.0k due within a year, and liabilities of AU$3.79m falling due after that. Offsetting these obligations, it had cash of AU$4.10m as well as receivables valued at AU$47.0k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$226.0k.

This state of affairs indicates that Flinders Mines's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the AU$171.4m company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Flinders Mines boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Flinders Mines's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Given its lack of meaningful operating revenue, investors are probably hoping that Flinders Mines finds some valuable resources, before it runs out of money.

So How Risky Is Flinders Mines?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Flinders Mines had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through AU$11m of cash and made a loss of AU$8.1m. Given it only has net cash of AU$979.0k, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. Be aware that Flinders Mines is showing 4 warning signs in our investment analysis , and 2 of those make us uncomfortable…

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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