NGEx Minerals (CVE:NGEX) 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.' 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. Importantly, NGEx Minerals Ltd. (CVE:NGEX) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for NGEx Minerals

How Much Debt Does NGEx Minerals Carry?

The image below, which you can click on for greater detail, shows that at September 2021 NGEx Minerals had debt of CA$2.69m, up from none in one year. On the flip side, it has CA$1.39m in cash leading to net debt of about CA$1.31m.

How Strong Is NGEx Minerals' Balance Sheet?

We can see from the most recent balance sheet that NGEx Minerals had liabilities of CA$4.15m falling due within a year, and liabilities of CA$346.2k due beyond that. Offsetting these obligations, it had cash of CA$1.39m as well as receivables valued at CA$57.0k due within 12 months. So it has liabilities totalling CA$3.06m more than its cash and near-term receivables, combined.

This state of affairs indicates that NGEx Minerals' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CA$253.0m company is struggling for cash, we still think it's worth monitoring its balance sheet. But either way, NGEx Minerals has virtually no net debt, 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 NGEx Minerals'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 NGEx Minerals finds some valuable resources, before it runs out of money.

Caveat Emptor

Importantly, NGEx Minerals had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CA$4.8m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any 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$3.0m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for NGEx Minerals you should be aware of, and 2 of them are potentially serious.

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.