We Think Omineca Mining and Metals (CVE:OMM) Has A Fair Chunk Of Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Omineca Mining and Metals Ltd. (CVE:OMM) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Omineca Mining and Metals

How Much Debt Does Omineca Mining and Metals Carry?

As you can see below, at the end of March 2023, Omineca Mining and Metals had CA$9.61m of debt, up from CA$8.79m a year ago. Click the image for more detail. On the flip side, it has CA$2.76m in cash leading to net debt of about CA$6.85m.

How Strong Is Omineca Mining and Metals' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Omineca Mining and Metals had liabilities of CA$798.3k due within 12 months and liabilities of CA$9.93m due beyond that. Offsetting these obligations, it had cash of CA$2.76m as well as receivables valued at CA$297.2k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$7.68m.

This deficit is considerable relative to its market capitalization of CA$9.79m, so it does suggest shareholders should keep an eye on Omineca Mining and Metals' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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.

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. To be specific the EBIT loss came in at CA$920k. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CA$1.8m in negative free cash flow over the last twelve months. 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 5 warning signs with Omineca Mining and Metals (at least 4 which don't sit too well with us) , and understanding them should be part of your investment process.

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.