Is Metis Energy (SGX:L02) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies Metis Energy Limited (SGX:L02) makes use of debt. But the real question is whether this debt is making the company risky.

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. 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.

Check out our latest analysis for Metis Energy

What Is Metis Energy's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Metis Energy had S$17.8m of debt, an increase on none, over one year. But it also has S$19.9m in cash to offset that, meaning it has S$2.09m net cash.

A Look At Metis Energy's Liabilities

We can see from the most recent balance sheet that Metis Energy had liabilities of S$20.1m falling due within a year, and liabilities of S$29.6m due beyond that. On the other hand, it had cash of S$19.9m and S$6.23m worth of receivables due within a year. So it has liabilities totalling S$23.6m more than its cash and near-term receivables, combined.

Given Metis Energy has a market capitalization of S$165.0m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Metis Energy boasts net cash, so it's fair to say it does not have a heavy debt load! 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.

Over 12 months, Metis Energy reported revenue of S$13m, which is a gain of 27%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Metis Energy?

While Metis Energy lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of S$4.5m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. The good news for Metis Energy shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But we still think it's somewhat 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. For instance, we've identified 2 warning signs for Metis Energy that 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.