Does Mene (CVE:MENE) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Mene Inc. (CVE:MENE) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Our analysis indicates that MENE is potentially undervalued!

What Is Mene's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Mene had CA$10.6m of debt, an increase on CA$9.67m, over one year. But it also has CA$15.2m in cash to offset that, meaning it has CA$4.65m net cash.

How Healthy Is Mene's Balance Sheet?

According to the balance sheet data, Mene had liabilities of CA$11.9m due within 12 months, but no longer term liabilities. On the other hand, it had cash of CA$15.2m and CA$172.7k worth of receivables due within a year. So it can boast CA$3.48m more liquid assets than total liabilities.

This short term liquidity is a sign that Mene could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Mene has more cash than debt is arguably a good indication that it can manage its debt safely.

Importantly, Mene grew its EBIT by 31% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Mene 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Mene has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last two years, Mene saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Mene has CA$4.65m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 31% over the last year. So we are not troubled with Mene's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Mene is showing 1 warning sign in our investment analysis , you should know about...

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.

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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.