Mako Mining (CVE:MKO) Is Carrying A Fair Bit Of Debt

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. As with many other companies Mako Mining Corp. (CVE:MKO) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Mako Mining

What Is Mako Mining's Net Debt?

As you can see below, Mako Mining had US$14.7m of debt at March 2023, down from US$18.2m a year prior. However, it does have US$641.0k in cash offsetting this, leading to net debt of about US$14.0m.

How Healthy Is Mako Mining's Balance Sheet?

According to the last reported balance sheet, Mako Mining had liabilities of US$27.2m due within 12 months, and liabilities of US$2.97m due beyond 12 months. Offsetting this, it had US$641.0k in cash and US$1.32m in receivables that were due within 12 months. So it has liabilities totalling US$28.2m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Mako Mining has a market capitalization of US$58.7m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Mako Mining'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.

In the last year Mako Mining wasn't profitable at an EBIT level, but managed to grow its revenue by 18%, to US$62m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Mako Mining had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping US$6.4m. 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. For example, we would not want to see a repeat of last year's loss of US$9.6m. So in short it's a really risky stock. 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. We've identified 1 warning sign with Mako Mining , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.