Warren Buffett famously said, '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. Importantly, Ucore Rare Metals Inc. (CVE:UCU) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Ucore Rare Metals

How Much Debt Does Ucore Rare Metals Carry?

As you can see below, at the end of March 2021, Ucore Rare Metals had CA$2.89m of debt, up from CA$1.25m a year ago. Click the image for more detail. But on the other hand it also has CA$7.21m in cash, leading to a CA$4.33m net cash position.

A Look At Ucore Rare Metals' Liabilities

According to the last reported balance sheet, Ucore Rare Metals had liabilities of CA$2.07m due within 12 months, and liabilities of CA$1.88m due beyond 12 months. Offsetting this, it had CA$7.21m in cash and CA$709.2k in receivables that were due within 12 months. So it can boast CA$3.97m more liquid assets than total liabilities.

This surplus suggests that Ucore Rare Metals has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Ucore Rare Metals boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Ucore Rare Metals'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.

Since Ucore Rare Metals has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.

So How Risky Is Ucore Rare Metals?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Ucore Rare Metals had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CA$5.0m of cash and made a loss of CA$5.3m. With only CA$4.33m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet – far from it. For instance, we've identified 5 warning signs for Ucore Rare Metals (2 are a bit unpleasant) you should be aware of.

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. 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.

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