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. We can see that Mene Inc. (CVE:MENE) does use debt in its business. But the more important question is: how much risk is that debt creating?
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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Mene
What Is Mene's Debt?
As you can see below, Mene had CA$20.3m of debt at September 2020, down from CA$27.4m a year prior. On the flip side, it has CA$17.9m in cash leading to net debt of about CA$2.39m.
How Strong Is Mene's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Mene had liabilities of CA$21.3m due within 12 months and no liabilities due beyond that. Offsetting these obligations, it had cash of CA$17.9m as well as receivables valued at CA$111.2k due within 12 months. So its liabilities total CA$3.23m more than the combination of its cash and short-term receivables.
Since publicly traded Mene shares are worth a total of CA$154.1m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But it is Mene's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
In the last year Mene wasn't profitable at an EBIT level, but managed to grow its revenue by 60%, to CA$19m. Shareholders probably have their fingers crossed that it can grow its way to profits.
Caveat Emptor
Despite the top line growth, Mene still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CA$2.9m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CA$362k of cash over the last year. So to be blunt we think it is risky. 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 Mene insider transactions.
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. 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.
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About TSXV:MENE
Mene
Designs, manufactures, and markets 24 karat gold and platinum jewelry worldwide.
Flawless balance sheet very low.
