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. We note that Lifezone Metals Limited (NYSE:LZM) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Lifezone Metals Carry?

As you can see below, at the end of December 2023, Lifezone Metals had US$1.79m of debt, up from none a year ago. Click the image for more detail. However, it does have US$49.4m in cash offsetting this, leading to net cash of US$47.6m.

A Look At Lifezone Metals' Liabilities

Zooming in on the latest balance sheet data, we can see that Lifezone Metals had liabilities of US$12.8m due within 12 months and liabilities of US$1.19m due beyond that. On the other hand, it had cash of US$49.4m and US$2.72m worth of receivables due within a year. So it actually has US$38.2m more liquid assets than total liabilities.

This short term liquidity is a sign that Lifezone Metals could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Lifezone Metals 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 ultimately the future profitability of the business will decide if Lifezone Metals can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Lifezone Metals made a loss at the EBIT level, and saw its revenue drop to US$1.0m, which is a fall of 62%. To be frank that doesn't bode well.

So How Risky Is Lifezone Metals?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Lifezone Metals had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$77m and booked a US$361m accounting loss. Given it only has net cash of US$47.6m, the company may need to raise more capital if it doesn't reach break-even 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. 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 4 warning signs for Lifezone Metals (of which 1 can't be ignored!) you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.