Is Metro Mining (ASX:MMI) Using Debt Sensibly?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, Metro Mining Limited (ASX:MMI) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Metro Mining

What Is Metro Mining's Debt?

The image below, which you can click on for greater detail, shows that at June 2023 Metro Mining had debt of AU$76.6m, up from AU$44.7m in one year. On the flip side, it has AU$20.2m in cash leading to net debt of about AU$56.4m.

How Healthy Is Metro Mining's Balance Sheet?

We can see from the most recent balance sheet that Metro Mining had liabilities of AU$51.0m falling due within a year, and liabilities of AU$101.0m due beyond that. Offsetting this, it had AU$20.2m in cash and AU$6.93m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$124.9m.

The deficiency here weighs heavily on the AU$74.2m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Metro Mining would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Metro Mining 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.

In the last year Metro Mining had a loss before interest and tax, and actually shrunk its revenue by 7.8%, to AU$177m. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Metro Mining produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable AU$20m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of AU$15m over the last twelve months. That means it's on the risky side of things. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Metro Mining is showing 1 warning sign in our investment analysis , 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.