Mega Uranium (TSE:MGA) Has Debt But No Earnings; Should You Worry?

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.' 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 Mega Uranium Ltd. (TSE:MGA) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

Check out 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 September 2024 Mega Uranium had debt of CA$15.1m, up from CA$8.62m in one year. But it also has CA$27.9m in cash to offset that, meaning it has CA$12.8m net cash.

A Look At Mega Uranium's Liabilities

Zooming in on the latest balance sheet data, we can see that Mega Uranium had liabilities of CA$16.8m due within 12 months and liabilities of CA$1.32m due beyond that. Offsetting this, it had CA$27.9m in cash and CA$163.0k in receivables that were due within 12 months. So it can boast CA$9.94m 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. Simply put, the fact that Mega Uranium has more cash than debt is arguably a good indication that it can manage its debt safely. 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?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Mega Uranium had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CA$946k of cash and made a loss of CA$6.1m. But the saving grace is the CA$12.8m on the balance sheet. That means it could keep spending at its current rate for more than two years. 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. 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. For instance, we've identified 3 warning signs for Mega Uranium (1 can't be ignored) you should be aware of.

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. 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.