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 Metro Mining Limited (ASX:MMI) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Metro Mining
What Is Metro Mining's Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2024 Metro Mining had AU$87.2m of debt, an increase on AU$76.6m, over one year. However, it does have AU$13.4m in cash offsetting this, leading to net debt of about AU$73.8m.
How Healthy Is Metro Mining's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Metro Mining had liabilities of AU$111.7m due within 12 months and liabilities of AU$88.1m due beyond that. Offsetting this, it had AU$13.4m in cash and AU$18.7m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$167.8m.
This is a mountain of leverage relative to its market capitalization of AU$232.3m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 44%, to AU$255m. With any luck the company will be able to grow its way to profitability.
Caveat Emptor
Even though Metro Mining managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost AU$10m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled AU$16m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. For example - Metro Mining has 2 warning signs we think you should be aware of.
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.
About ASX:MMI
High growth potential and good value.
