Is Marifil Mines (CVE:MFM) 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. We note that Marifil Mines Limited (CVE:MFM) does have debt on its balance sheet. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Marifil Mines
What Is Marifil Mines's Debt?
The image below, which you can click on for greater detail, shows that at March 2019 Marifil Mines had debt of CA$52.6k, up from CA$46.1k in one year. However, its balance sheet shows it holds CA$645.8k in cash, so it actually has CA$593.2k net cash.
How Strong Is Marifil Mines's Balance Sheet?
According to the balance sheet data, Marifil Mines had liabilities of CA$700.6k due within 12 months, but no longer term liabilities. Offsetting this, it had CA$645.8k in cash and CA$92.2k in receivables that were due within 12 months. So it actually has CA$37.4k more liquid assets than total liabilities.
This state of affairs indicates that Marifil Mines's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CA$7.36m company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Marifil 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 it is Marifil Mines'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.
Since Marifil Mines has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.
So How Risky Is Marifil Mines?
By their very nature companies that are losing money are more risky than those with a long history of profitability. Anf the fact is that over the last twelve months Marifil Mines lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CA$2.0m and booked a CA$1.3m accounting loss. With only CA$646k on the balance sheet, it would appear that its going to need to raise capital again 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. For riskier companies like Marifil Mines 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.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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.
