Would Omineca Mining and Metals (CVE:OMM) Be Better Off With Less Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Omineca Mining and Metals Ltd. (CVE:OMM) does carry debt. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Omineca Mining and Metals

How Much Debt Does Omineca Mining and Metals Carry?

The image below, which you can click on for greater detail, shows that at September 2023 Omineca Mining and Metals had debt of CA$9.97m, up from CA$9.24m in one year. However, because it has a cash reserve of CA$1.77m, its net debt is less, at about CA$8.20m.

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$539.7k falling due within a year, and liabilities of CA$10.3m due beyond that. Offsetting this, it had CA$1.77m in cash and CA$281.4k in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$8.78m.

This is a mountain of leverage relative to its market capitalization of CA$12.5m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. 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.

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

Importantly, Omineca Mining and Metals had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CA$1.1m. 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CA$1.8m of cash over the last year. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 6 warning signs for Omineca Mining and Metals (of which 4 are a bit unpleasant!) you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.