Metalla Royalty & Streaming (CVE:MTA) Is Making Moderate Use Of Debt

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Metalla Royalty & Streaming Ltd. (CVE:MTA) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

Our analysis indicates that MTA is potentially undervalued!

How Much Debt Does Metalla Royalty & Streaming Carry?

The image below, which you can click on for greater detail, shows that at June 2022 Metalla Royalty & Streaming had debt of US$10.8m, up from US$3.06m in one year. However, because it has a cash reserve of US$3.37m, its net debt is less, at about US$7.44m.

How Strong Is Metalla Royalty & Streaming's Balance Sheet?

We can see from the most recent balance sheet that Metalla Royalty & Streaming had liabilities of US$11.4m falling due within a year, and liabilities of US$426.8k due beyond that. Offsetting this, it had US$3.37m in cash and US$1.16m in receivables that were due within 12 months. So it has liabilities totalling US$7.31m more than its cash and near-term receivables, combined.

Since publicly traded Metalla Royalty & Streaming shares are worth a total of US$208.0m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Metalla Royalty & Streaming's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Metalla Royalty & Streaming reported revenue of US$2.7m, which is a gain of 4.7%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Metalla Royalty & Streaming had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$8.3m at the EBIT level. 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 US$13m 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. However, not all investment risk resides within the balance sheet - far from it. For example Metalla Royalty & Streaming has 4 warning signs (and 1 which is significant) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.