Is Lithium Energi Exploration (CVE:LEXI) Using Debt Sensibly?

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.' 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 note that Lithium Energi Exploration Inc. (CVE:LEXI) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. 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

How Much Debt Does Lithium Energi Exploration Carry?

As you can see below, Lithium Energi Exploration had CA$5.70m of debt at May 2023, down from CA$8.09m a year prior. However, it does have CA$5.81m in cash offsetting this, leading to net cash of CA$112.0k.

How Healthy Is Lithium Energi Exploration's Balance Sheet?

According to the last reported balance sheet, Lithium Energi Exploration had liabilities of CA$298.1k due within 12 months, and liabilities of CA$5.70m due beyond 12 months. Offsetting these obligations, it had cash of CA$5.81m as well as receivables valued at CA$94.7k due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that Lithium Energi Exploration's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CA$25.8m company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Lithium Energi Exploration boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Lithium Energi Exploration's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

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

So How Risky Is Lithium Energi Exploration?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Lithium Energi Exploration lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CA$2.1m of cash and made a loss of CA$6.6m. With only CA$112.0k on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see 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. Be aware that Lithium Energi Exploration is showing 4 warning signs in our investment analysis , and 3 of those are significant...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.