Is Metro Mining (ASX:MMI) using too much debt?

Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. We can see that Metro Mining Limited (ASX:MMI) uses debt in its business. But does this debt worry shareholders?

What risk does debt carry?

Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. In the worst case, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, many companies use debt to finance their growth, without any negative consequences. When we look at debt levels, we first consider cash and debt levels, together.

Check out our latest analysis for Metro Mining

What is Metro Mining’s net debt?

As you can see below, Metro Mining had A$35.8 million in debt as of December 2021, roughly the same as the previous year. You can click on the graph for more details. However, he has A$13.9 million in cash to offset this, resulting in a net debt of around A$21.9 million.

ASX: MMI Debt to Equity History June 16, 2022

How strong is Metro Mining’s balance sheet?

According to the latest published balance sheet, Metro Mining had liabilities of A$46.9 million due within 12 months and liabilities of A$63.4 million due beyond 12 months. In return, he had A$13.9 million in cash and A$16.8 million in debt due within 12 months. Thus, its liabilities outweigh the sum of its cash and (current) receivables of A$79.6 million.

Given that this deficit is actually larger than the company’s market capitalization of A$53.8 million, we think shareholders really should be watching Metro Mining’s debt levels, like a parent watching their child do cycling for the first time. In the scenario where the company were to quickly clean up its balance sheet, it seems likely that shareholders would suffer significant dilution. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Metro Mining can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

Last year, Metro Mining was unprofitable on an EBIT basis, but managed to increase revenue by 25% to A$160 million. The shareholders probably have their fingers crossed that she can make a profit.

Caveat Emptor

Despite the growth in revenue, Metro Mining still posted a loss in earnings before interest and taxes (EBIT) over the past year. Indeed, it lost a very considerable 91 million Australian dollars in terms of EBIT. Considering that, along with the liabilities mentioned above, we are nervous about the business. We would like to see strong improvements in the short term before getting too interested in the title. Not least because it has burned A$18 million in negative free cash flow over the past year. That means it’s on the risky side of things. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. We have identified 4 warning signs with Metro Mining (at least 1 that cannot be ignored), and understanding them should be part of your investment process.

In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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