Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Lifezone Metals Limited (NYSE:LZM) makes use of debt. But should shareholders be worried about its use of debt?

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When Is Debt A Problem?

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Lifezone Metals's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 Lifezone Metals had US$26.2m of debt, an increase on none, over one year. However, its balance sheet shows it holds US$29.3m in cash, so it actually has US$3.05m net cash.

How Healthy Is Lifezone Metals' Balance Sheet?

According to the last reported balance sheet, Lifezone Metals had liabilities of US$56.0m due within 12 months, and liabilities of US$1.33m due beyond 12 months. Offsetting this, it had US$29.3m in cash and US$2.21m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$25.8m.

Of course, Lifezone Metals has a market capitalization of US$284.6m, 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. While it does have liabilities worth noting, Lifezone Metals also has more cash than debt, so we're pretty confident it can manage its debt safely. 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're focused on the future you can check out this free report showing analyst profit forecasts .

View our latest analysis for Lifezone Metals

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

So How Risky Is Lifezone Metals?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Lifezone Metals lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$67m of cash and made a loss of US$46m. Given it only has net cash of US$3.05m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. We've identified 2 warning signs with Lifezone Metals (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.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.