Is Mene (CVE:MENE) Using Debt In A Risky Way?

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. Importantly, Mene Inc. (CVE:MENE) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Mene

What Is Mene's Debt?

The image below, which you can click on for greater detail, shows that at September 2022 Mene had debt of CA$10.5m, up from CA$9.91m in one year. However, its balance sheet shows it holds CA$10.8m in cash, so it actually has CA$278.9k 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$10.8m and CA$227.8k worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$868.5k.

This state of affairs indicates that Mene's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CA$98.7m company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Mene also has more cash than debt, so 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 Mene will need earnings to service that debt. 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 5.4%, to CA$27m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Mene?

Although Mene had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CA$5.3m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Mene you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.