Is Mega Uranium (TSE:MGA) Using Debt Sensibly?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Mega Uranium Ltd. (TSE:MGA) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. 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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Mega Uranium

What Is Mega Uranium's Net Debt?

As you can see below, at the end of June 2023, Mega Uranium had CA$5.30m of debt, up from none a year ago. Click the image for more detail. However, it does have CA$17.6m in cash offsetting this, leading to net cash of CA$12.3m.

How Healthy Is Mega Uranium's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Mega Uranium had liabilities of CA$6.64m due within 12 months and liabilities of CA$360.0k due beyond that. On the other hand, it had cash of CA$17.6m and CA$270.0k worth of receivables due within a year. So it can boast CA$10.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Mega Uranium could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Mega Uranium boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Mega Uranium 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.

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 in the last year Mega Uranium had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CA$169k of cash and made a loss of CA$1.5m. But at least it has CA$12.3m on the balance sheet to spend on growth, near-term. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Mega Uranium is showing 3 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

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.