Omineca Mining and Metals (CVE:OMM) Is Carrying A Fair Bit Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Omineca Mining and Metals Ltd. (CVE:OMM) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Omineca Mining and Metals

What Is Omineca Mining and Metals's Debt?

The image below, which you can click on for greater detail, shows that Omineca Mining and Metals had debt of CA$8.57m at the end of December 2021, a reduction from CA$9.32m over a year. However, because it has a cash reserve of CA$1.39m, its net debt is less, at about CA$7.18m.

A Look At Omineca Mining and Metals' Liabilities

The latest balance sheet data shows that Omineca Mining and Metals had liabilities of CA$564.4k due within a year, and liabilities of CA$8.89m falling due after that. On the other hand, it had cash of CA$1.39m and CA$274.8k worth of receivables due within a year. So its liabilities total CA$7.79m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Omineca Mining and Metals is worth CA$21.9m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. 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 you can't view debt in total isolation; since Omineca Mining and Metals will need earnings to service that debt. 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 Omineca Mining and Metals finds some valuable resources, before it runs out of money.

Caveat Emptor

Over the last twelve months Omineca Mining and Metals produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CA$1.3m at the EBIT level. 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. However, it doesn't help that it burned through CA$3.9m of cash over the last year. So suffice it to say we consider the stock very 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. We've identified 5 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.

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.