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Auditors Are Concerned About Northern Vertex Mining (CVE:NEE)

Simply Wall St

When Northern Vertex Mining Corp. (CVE:NEE) reported its results to June 2019 its auditors, Meyers Norris Penny LLP - MNP LLP could not be sure that it would be able to continue as a going concern in the next year. Thus we can say that, based on the results to that date, the company should raise capital or otherwise raise cash, without much delay.

If the company does have to issue more shares, potential investors will be sure to consider how desperate it is for capital. So it is suddenly extremely important to consider whether the company is taking too much risk on its balance sheet. The biggest concern we would have is the company's debt, since its lenders might force the company into administration if it cannot repay them.

See our latest analysis for Northern Vertex Mining

What Is Northern Vertex Mining's Debt?

The image below, which you can click on for greater detail, shows that Northern Vertex Mining had debt of US$13.2m at the end of June 2019, a reduction from US$34.5m over a year. However, it does have US$3.44m in cash offsetting this, leading to net debt of about US$9.75m.

TSXV:NEE Historical Debt, November 4th 2019

A Look At Northern Vertex Mining's Liabilities

We can see from the most recent balance sheet that Northern Vertex Mining had liabilities of US$23.8m falling due within a year, and liabilities of US$30.5m due beyond that. On the other hand, it had cash of US$3.44m and US$25.0k worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$50.8m.

This deficit is considerable relative to its market capitalization of US$55.3m, so it does suggest shareholders should keep an eye on Northern Vertex Mining's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Northern Vertex Mining's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

While it hasn't made a profit, at least Northern Vertex Mining booked its first revenue as a publicly listed company, in the last twelve months.

Caveat Emptor

Importantly, Northern Vertex Mining had negative earnings before interest and tax (EBIT), over the last year. Indeed, it lost US$5.3m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$12m of cash over the last year. So suffice it to say we consider the stock very risky. We prefer to avoid a company after its auditor has expressed any uncertainty about its ability to continue as a going concern. That's because we find it more comfortable to invest in companies that always keep the balance sheet reasonably strong. For riskier companies like Northern Vertex Mining I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.