Is Lithium Energi Exploration (CVE:LEXI) A Risky Investment?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Lithium Energi Exploration Inc. (CVE:LEXI) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Lithium Energi Exploration

What Is Lithium Energi Exploration's Net Debt?

The image below, which you can click on for greater detail, shows that Lithium Energi Exploration had debt of CA$5.98m at the end of November 2023, a reduction from CA$8.67m over a year. However, it does have CA$2.63m in cash offsetting this, leading to net debt of about CA$3.36m.

How Strong Is Lithium Energi Exploration's Balance Sheet?

The latest balance sheet data shows that Lithium Energi Exploration had liabilities of CA$951.1k due within a year, and liabilities of CA$5.98m falling due after that. On the other hand, it had cash of CA$2.63m and CA$117.2k worth of receivables due within a year. So its liabilities total CA$4.19m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Lithium Energi Exploration is worth CA$8.30m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But it is Lithium Energi Exploration's earnings that will influence how the balance sheet holds up in the future. 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.

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

Caveat Emptor

Importantly, Lithium Energi Exploration had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping CA$11m. 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$4.7m in negative free cash flow over the last twelve months. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Lithium Energi Exploration is showing 6 warning signs in our investment analysis , and 5 of those are concerning...

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.