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Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ 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 Globex Mining Enterprises Inc. (TSE:GMX) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.
What Is Globex Mining Enterprises’s Debt?
As you can see below, Globex Mining Enterprises had CA$48.5k of debt at March 2019, down from CA$53.1k a year prior. But it also has CA$3.28m in cash to offset that, meaning it has CA$3.24m net cash.
How Strong Is Globex Mining Enterprises’s Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Globex Mining Enterprises had liabilities of CA$317.0k due within 12 months and liabilities of CA$793.9k due beyond that. On the other hand, it had cash of CA$3.28m and CA$276.6k worth of receivables due within a year. So it actually has CA$2.45m more liquid assets than total liabilities.
This surplus suggests that Globex Mining Enterprises has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Given that Globex Mining Enterprises has more cash than debt, we’re pretty confident it can manage its debt safely. There’s no doubt that we learn most about debt from the balance sheet. But you can’t view debt in total isolation; since Globex Mining Enterprises will need earnings to service that debt. So when considering debt, it’s definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, Globex Mining Enterprises saw its revenue drop to CA$2.5m, which is a fall of 41%. That makes us nervous, to say the least.
So How Risky Is Globex Mining Enterprises?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Globex Mining Enterprises had negative earnings before interest and tax (EBIT), truth be told. And over the same period it saw negative free cash outflow of CA$1.3m and booked a CA$703k accounting loss. However, it has net cash of CA$3.3m, so it has a bit of time before it will need more capital. 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. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Globex Mining Enterprises insider transactions.
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.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.