Does Mkango Resources (CVE:MKA) Have A Healthy Balance Sheet?

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.' 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 Mkango Resources Ltd. (CVE:MKA) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Mkango Resources

What Is Mkango Resources's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Mkango Resources had US$1.83m of debt, an increase on US$606.6k, over one year. However, it does have US$4.55m in cash offsetting this, leading to net cash of US$2.72m.

How Strong Is Mkango Resources' Balance Sheet?

According to the last reported balance sheet, Mkango Resources had liabilities of US$557.9k due within 12 months, and liabilities of US$1.88m due beyond 12 months. Offsetting these obligations, it had cash of US$4.55m as well as receivables valued at US$25.7k due within 12 months. So it can boast US$2.14m more liquid assets than total liabilities.

This short term liquidity is a sign that Mkango Resources could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Mkango Resources 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 Mkango Resources'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.

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

So How Risky Is Mkango Resources?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Mkango Resources lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$4.1m of cash and made a loss of US$3.4m. However, it has net cash of US$2.72m, so it has a bit of time before it will need more capital. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. We've identified 5 warning signs with Mkango Resources (at least 3 which don't sit too well with us) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.