Is Mega Uranium (TSE:MGA) Using Debt In A Risky Way?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Mega Uranium Ltd. (TSE:MGA) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Mega Uranium

What Is Mega Uranium's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2022 Mega Uranium had debt of CA$2.21m, up from none in one year. But on the other hand it also has CA$17.7m in cash, leading to a CA$15.5m net cash position.

A Look At Mega Uranium's Liabilities

According to the balance sheet data, Mega Uranium had liabilities of CA$3.72m due within 12 months, but no longer term liabilities. Offsetting this, it had CA$17.7m in cash and CA$325.0k in receivables that were due within 12 months. So it can boast CA$14.3m more liquid assets than total liabilities.

This surplus suggests that Mega Uranium is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Mega Uranium has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Mega Uranium's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Given its lack of meaningful operating revenue, Mega Uranium shareholders no doubt hope it can fund itself until it can sell some combustibles.

So How Risky Is Mega Uranium?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Mega Uranium lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CA$802k and booked a CA$8.5m accounting loss. But at least it has CA$15.5m on the balance sheet to spend on growth, near-term. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Mega Uranium (of which 1 is potentially serious!) you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.