Euro Manganese (CVE:EMN) Is Carrying A Fair Bit Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Euro Manganese Inc. (CVE:EMN) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Euro Manganese

What Is Euro Manganese's Net Debt?

As you can see below, at the end of December 2023, Euro Manganese had CA$25.7m of debt, up from none a year ago. Click the image for more detail. However, it also had CA$24.3m in cash, and so its net debt is CA$1.45m.

How Healthy Is Euro Manganese's Balance Sheet?

We can see from the most recent balance sheet that Euro Manganese had liabilities of CA$4.76m falling due within a year, and liabilities of CA$25.7m due beyond that. Offsetting this, it had CA$24.3m in cash and CA$1.64m in receivables that were due within 12 months. So its liabilities total CA$4.56m more than the combination of its cash and short-term receivables.

Of course, Euro Manganese has a market capitalization of CA$34.2m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Euro Manganese can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Given its lack of meaningful operating revenue, investors are probably hoping that Euro Manganese finds some valuable resources, before it runs out of money.

Caveat Emptor

Over the last twelve months Euro Manganese produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping CA$12m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CA$13m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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 Euro Manganese is showing 3 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.