Does Lithium Energi Exploration (CVE:LEXI) Have A Healthy Balance Sheet?

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.' 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 Lithium Energi Exploration Inc. (CVE:LEXI) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Lithium Energi Exploration

What Is Lithium Energi Exploration's Net Debt?

As you can see below, Lithium Energi Exploration had CA$5.84m of debt at August 2023, down from CA$8.27m a year prior. However, because it has a cash reserve of CA$4.03m, its net debt is less, at about CA$1.80m.

How Strong Is Lithium Energi Exploration's Balance Sheet?

The latest balance sheet data shows that Lithium Energi Exploration had liabilities of CA$262.9k due within a year, and liabilities of CA$5.84m falling due after that. On the other hand, it had cash of CA$4.03m and CA$100.8k worth of receivables due within a year. So its liabilities total CA$1.97m more than the combination of its cash and short-term receivables.

Since publicly traded Lithium Energi Exploration shares are worth a total of CA$15.7m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Lithium Energi Exploration will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Since Lithium Energi Exploration has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.

Caveat Emptor

Over the last twelve months Lithium Energi Exploration produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping CA$7.4m. 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$3.3m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. For example Lithium Energi Exploration has 5 warning signs (and 4 which are a bit unpleasant) we think 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.