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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 Cameco Corporation (TSE:CCO) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
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. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Cameco
What Is Cameco's Net Debt?
As you can see below, Cameco had CA$1.04b of debt, at March 2022, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has CA$1.48b in cash, leading to a CA$440.9m net cash position.
How Healthy Is Cameco's Balance Sheet?
The latest balance sheet data shows that Cameco had liabilities of CA$434.2m due within a year, and liabilities of CA$2.16b falling due after that. Offsetting these obligations, it had cash of CA$1.48b as well as receivables valued at CA$195.5m due within 12 months. So it has liabilities totalling CA$923.9m more than its cash and near-term receivables, combined.
Of course, Cameco has a market capitalization of CA$10.8b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Cameco boasts net cash, so it's fair to say it does not have a heavy debt load!
We saw Cameco grow its EBIT by 5.7% in the last twelve months. That's far from incredible but it is a good thing, when it comes to paying off debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Cameco can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Cameco 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 three years, Cameco actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.