Is Mene (CVE:MENE) Using Too Much Debt?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Mene Inc. (CVE:MENE) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Mene

What Is Mene's Debt?

The image below, which you can click on for greater detail, shows that Mene had debt of CA$19.0m at the end of March 2020, a reduction from CA$28.4m over a year. But it also has CA$23.6m in cash to offset that, meaning it has CA$4.60m net cash.

How Healthy Is Mene's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Mene had liabilities of CA$20.3m due within 12 months and no liabilities due beyond that. Offsetting this, it had CA$23.6m in cash and CA$526.9k in receivables that were due within 12 months. So it can boast CA$3.80m more liquid assets than total liabilities.

This short term liquidity is a sign that Mene could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Mene 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 Mene'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 Mene wasn't profitable at an EBIT level, but managed to grow its revenue by 65%, to CA$15m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Mene?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Mene had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CA$328.6k and booked a CA$7.5m accounting loss. However, it has net cash of CA$4.60m, so it has a bit of time before it will need more capital. Mene'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. Consider risks, for instance. Every company has them, and we've spotted 3 warning signs for Mene you should know about.

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.

This article by Simply Wall St is general in nature. 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.

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