Here’s why Cameco (TSE: CCO) can manage its debt responsibly

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Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. We note that Cameco Company (TSE:CCO) has debt on its balance sheet. But the real question is whether this debt makes the business risky.

What risk does debt carry?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. If things go really bad, lenders can take over the business. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we look at debt levels, we first consider cash and debt levels, together.

See our latest analysis for Cameco

What is Cameco’s debt?

The graph below, which you can click on for more details, shows that Cameco had C$1.04 billion in debt in March 2022; about the same as the previous year. But on the other hand, it also has C$1.48 billion in liquidity, leading to a net cash position of C$440.9 million.

TSX:CCO Debt to Equity July 27, 2022

How healthy is Cameco’s balance sheet?

According to the last published balance sheet, Cameco had liabilities of C$434.2 million due within 12 months and liabilities of C$2.16 billion due beyond 12 months. On the other hand, it had liquid assets of 1.48 billion Canadian dollars and 195.5 million Canadian dollars of receivables due within one year. Thus, its liabilities total C$923.9 million more than the combination of its cash and short-term receivables.

Of course, Cameco has a market capitalization of C$11.7 billion, so those liabilities are probably manageable. That said, it is clear that we must continue to monitor its record, lest it deteriorate. While it has liabilities to note, Cameco also has more cash than debt, so we’re fairly confident it can manage its debt safely.

Cameco has increased its EBIT by 5.7% over the past year. It’s far from amazing, but it’s a good thing when it comes to paying down debt. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Cameco 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.

Finally, a business needs free cash flow to pay off its debts; book profits are not enough. Although Cameco has net cash on its balance sheet, it’s always worth looking at its ability to convert earnings before interest and taxes (EBIT) to free cash flow, to help us understand how fast it’s building (or erodes) this cash balance. . Over the past three years, Cameco has actually generated more free cash flow than EBIT. There’s nothing better than incoming money to stay in the good books of your lenders.

Summary

While it’s always a good idea to look at a company’s total liabilities, it’s very reassuring that Cameco has C$440.9 million in net cash. And it impressed us with a free cash flow of C$465 million, or 199% of its EBIT. We are therefore not concerned about the use of Cameco’s debt. Of course, we wouldn’t say no to the extra confidence we’d gain if we knew Cameco insiders were buying stock: if you’re on the same page, you can find out if insiders are buying by clicking this link .

In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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