Is Omineca Mining and Metals (CVE:OMM) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Omineca Mining and Metals Ltd. (CVE:OMM) makes use of debt. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Omineca Mining and Metals

What Is Omineca Mining and Metals's Net Debt?

The chart below, which you can click on for greater detail, shows that Omineca Mining and Metals had CA$9.01m in debt in June 2022; about the same as the year before. However, it does have CA$492.2k in cash offsetting this, leading to net debt of about CA$8.52m.

A Look At Omineca Mining and Metals' Liabilities

We can see from the most recent balance sheet that Omineca Mining and Metals had liabilities of CA$519.8k falling due within a year, and liabilities of CA$9.33m due beyond that. Offsetting this, it had CA$492.2k in cash and CA$343.2k in receivables that were due within 12 months. So it has liabilities totalling CA$9.02m more than its cash and near-term receivables, combined.

Omineca Mining and Metals has a market capitalization of CA$17.1m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Omineca Mining and Metals's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Since Omineca Mining and Metals has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.

Caveat Emptor

Over the last twelve months Omineca Mining and Metals produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CA$1.4m. 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. However, it doesn't help that it burned through CA$2.6m of cash over the last year. So suffice it to say we consider the stock very risky. 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. We've identified 6 warning signs with Omineca Mining and Metals (at least 3 which can't be ignored) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.