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The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 can see that Almaden Minerals Ltd. (TSE:AMM) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Almaden Minerals's Debt?
As you can see below, Almaden Minerals had CA$2.96m of debt, at June 2021, which is about the same as the year before. You can click the chart for greater detail. However, it does have CA$12.4m in cash offsetting this, leading to net cash of CA$9.43m.
How Strong Is Almaden Minerals' Balance Sheet?
We can see from the most recent balance sheet that Almaden Minerals had liabilities of CA$563.6k falling due within a year, and liabilities of CA$4.70m due beyond that. On the other hand, it had cash of CA$12.4m and CA$177.9k worth of receivables due within a year. So it can boast CA$7.29m more liquid assets than total liabilities.
This surplus suggests that Almaden Minerals has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Almaden Minerals has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Almaden Minerals'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 Almaden Minerals has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.
So How Risky Is Almaden Minerals?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Almaden Minerals had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CA$3.3m of cash and made a loss of CA$3.2m. With only CA$9.43m 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. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 4 warning signs for Almaden Minerals (1 shouldn't be ignored!) that you should be aware of before investing here.
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.
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.
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