Is Trigon Metals (CVE:TM) A Risky Investment?

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. We note that Trigon Metals Inc. (CVE:TM) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

See our latest analysis for Trigon Metals

What Is Trigon Metals's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 Trigon Metals had CA$2.86m of debt, an increase on none, over one year. However, it does have CA$554.9k in cash offsetting this, leading to net debt of about CA$2.31m.

How Strong Is Trigon Metals' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Trigon Metals had liabilities of CA$6.30m due within 12 months and liabilities of CA$3.28m due beyond that. Offsetting these obligations, it had cash of CA$554.9k as well as receivables valued at CA$1.61m due within 12 months. So it has liabilities totalling CA$7.42m more than its cash and near-term receivables, combined.

Since publicly traded Trigon Metals shares are worth a total of CA$62.2m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is Trigon Metals'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 Trigon Metals finds some valuable resources, before it runs out of money.

Caveat Emptor

Over the last twelve months Trigon Metals produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable CA$7.7m 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$18m 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. Be aware that Trigon Metals is showing 5 warning signs in our investment analysis , and 2 of those can't be ignored...

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.