Is Mega Uranium (TSE:MGA) Weighed On By Its Debt Load?

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.' 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. Importantly, Mega Uranium Ltd. (TSE:MGA) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Mega Uranium

How Much Debt Does Mega Uranium Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Mega Uranium had CA$5.30m of debt, an increase on none, over one year. But on the other hand it also has CA$17.6m in cash, leading to a CA$12.3m net cash position.

How Healthy Is Mega Uranium's Balance Sheet?

The latest balance sheet data shows that Mega Uranium had liabilities of CA$6.64m due within a year, and liabilities of CA$360.0k falling due after that. Offsetting these obligations, it had cash of CA$17.6m as well as receivables valued at CA$270.0k due within 12 months. So it actually has CA$10.8m more liquid assets than total liabilities.

This surplus suggests that Mega Uranium has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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 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.

Since Mega Uranium doesn't have significant operating revenue, shareholders must hope it'll sell some fossil fuels, before it runs out of money.

So How Risky Is Mega Uranium?

By their very nature companies that are losing money are more risky than those with a long history of profitability. 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. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Mega Uranium you should know about.

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.