Yahoo Finance Is Magnetite Mines (ASX:MGT) A Risky Investment?
Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Magnetite Mines Limited (ASX:MGT) does carry debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.
See our latest analysis for Magnetite Mines
What Is Magnetite Mines's Net Debt?
As you can see below, Magnetite Mines had AU$1.98m of debt, at December 2021, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has AU$12.3m in cash, leading to a AU$10.3m net cash position.
How Healthy Is Magnetite Mines' Balance Sheet?
According to the last reported balance sheet, Magnetite Mines had liabilities of AU$1.64m due within 12 months, and liabilities of AU$2.16m due beyond 12 months. Offsetting this, it had AU$12.3m in cash and AU$424.0k in receivables that were due within 12 months. So it can boast AU$8.92m more liquid assets than total liabilities.
This surplus suggests that Magnetite Mines has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Magnetite Mines boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Magnetite Mines will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Given its lack of meaningful operating revenue, investors are probably hoping that Magnetite Mines finds some valuable resources, before it runs out of money.
So How Risky Is Magnetite Mines?
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 Magnetite Mines lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of AU$7.4m and booked a AU$3.0m accounting loss. Given it only has net cash of AU$10.3m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. Be aware that Magnetite Mines is showing 4 warning signs in our investment analysis , and 1 of those shouldn't be ignored...
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.
