Health Check: How Prudently Does Metis Energy (SGX:L02) Use Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Metis Energy Limited (SGX:L02) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Metis Energy

What Is Metis Energy's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Metis Energy had S$17.2m of debt, an increase on none, over one year. However, it does have S$58.8m in cash offsetting this, leading to net cash of S$41.7m.

How Strong Is Metis Energy's Balance Sheet?

The latest balance sheet data shows that Metis Energy had liabilities of S$12.1m due within a year, and liabilities of S$29.5m falling due after that. On the other hand, it had cash of S$58.8m and S$8.55m worth of receivables due within a year. So it can boast S$25.8m more liquid assets than total liabilities.

This excess liquidity suggests that Metis Energy is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Metis Energy has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Metis Energy'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.

In the last year Metis Energy wasn't profitable at an EBIT level, but managed to grow its revenue by 24%, to S$14m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Metis Energy?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Metis Energy lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through S$30m of cash and made a loss of S$7.3m. However, it has net cash of S$41.7m, so it has a bit of time before it will need more capital. Metis Energy's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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. Case in point: We've spotted 1 warning sign for Metis Energy you should be aware of.

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.