U.S. markets closed
  • S&P 500

    3,825.33
    +39.95 (+1.06%)
     
  • Dow 30

    31,097.26
    +321.83 (+1.05%)
     
  • Nasdaq

    11,127.84
    +99.11 (+0.90%)
     
  • Russell 2000

    1,727.76
    +19.77 (+1.16%)
     
  • Crude Oil

    108.46
    +2.70 (+2.55%)
     
  • Gold

    1,812.90
    +5.60 (+0.31%)
     
  • Silver

    19.77
    -0.51 (-2.50%)
     
  • EUR/USD

    1.0426
    -0.0057 (-0.54%)
     
  • 10-Yr Bond

    2.8890
    -0.0830 (-2.79%)
     
  • GBP/USD

    1.2103
    -0.0072 (-0.59%)
     
  • USD/JPY

    135.1750
    -0.5530 (-0.41%)
     
  • BTC-USD

    19,382.12
    +475.44 (+2.51%)
     
  • CMC Crypto 200

    420.84
    +0.70 (+0.17%)
     
  • FTSE 100

    7,168.65
    -0.63 (-0.01%)
     
  • Nikkei 225

    25,935.62
    -457.42 (-1.73%)
     

Amerigo Resources (TSE:ARG) Could Easily Take On More Debt

  • Oops!
    Something went wrong.
    Please try again later.
·4 min read
In this article:
  • Oops!
    Something went wrong.
    Please try again later.

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Amerigo Resources Ltd. (TSE:ARG) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Amerigo Resources

What Is Amerigo Resources's Debt?

The image below, which you can click on for greater detail, shows that Amerigo Resources had debt of US$30.8m at the end of March 2022, a reduction from US$48.9m over a year. However, it does have US$71.5m in cash offsetting this, leading to net cash of US$40.7m.

debt-equity-history-analysis
debt-equity-history-analysis

A Look At Amerigo Resources' Liabilities

Zooming in on the latest balance sheet data, we can see that Amerigo Resources had liabilities of US$63.5m due within 12 months and liabilities of US$71.5m due beyond that. Offsetting these obligations, it had cash of US$71.5m as well as receivables valued at US$13.7m due within 12 months. So its liabilities total US$49.8m more than the combination of its cash and short-term receivables.

Amerigo Resources has a market capitalization of US$184.1m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Amerigo Resources also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Amerigo Resources grew its EBIT by 107% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Amerigo Resources can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Amerigo Resources may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Amerigo Resources actually produced more free cash flow than EBIT over the last two years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

Although Amerigo Resources's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$40.7m. And it impressed us with free cash flow of US$73m, being 116% of its EBIT. So we don't think Amerigo Resources's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Amerigo Resources is showing 4 warning signs in our investment analysis , and 1 of those is concerning...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.