Would BeMetals (CVE:BMET) Be Better Off With Less Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 BeMetals Corp. (CVE:BMET) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for BeMetals

What Is BeMetals's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 BeMetals had CA$6.90m of debt, an increase on none, over one year. However, it does have CA$6.04m in cash offsetting this, leading to net debt of about CA$866.1k.

How Strong Is BeMetals' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that BeMetals had liabilities of CA$376.9k due within 12 months and liabilities of CA$6.90m due beyond that. On the other hand, it had cash of CA$6.04m and CA$129.2k worth of receivables due within a year. So its liabilities total CA$1.11m more than the combination of its cash and short-term receivables.

Of course, BeMetals has a market capitalization of CA$19.5m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since BeMetals 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, investors are probably hoping that BeMetals finds some valuable resources, before it runs out of money.

Caveat Emptor

Importantly, BeMetals had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CA$2.1m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CA$7.6m in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that BeMetals is showing 4 warning signs in our investment analysis , and 3 of those are a bit concerning...

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.