Metis Energy (SGX:L02) Has Debt But No Earnings; Should You Worry?

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 is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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.

View our latest analysis for Metis Energy

How Much Debt Does Metis Energy Carry?

The image below, which you can click on for greater detail, shows that Metis Energy had debt of S$16.1m at the end of December 2023, a reduction from S$17.8m over a year. However, it does have S$36.5m in cash offsetting this, leading to net cash of S$20.4m.

How Strong Is Metis Energy's Balance Sheet?

The latest balance sheet data shows that Metis Energy had liabilities of S$15.1m due within a year, and liabilities of S$28.4m falling due after that. Offsetting these obligations, it had cash of S$36.5m as well as receivables valued at S$13.5m due within 12 months. So it can boast S$6.39m more liquid assets than total liabilities.

This surplus suggests that Metis Energy has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Metis Energy has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. 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 had a loss before interest and tax, and actually shrunk its revenue by 71%, to S$3.7m. To be frank that doesn't bode well.

So How Risky Is Metis Energy?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Metis Energy had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of S$47m and booked a S$9.6m accounting loss. Given it only has net cash of S$20.4m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with Metis Energy (including 1 which is a bit concerning) .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.