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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We note that Aris Gold Corporation (TSE:ARIS) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Aris Gold Carry?
You can click the graphic below for the historical numbers, but it shows that as of June 2021 Aris Gold had US$84.2m of debt, an increase on none, over one year. However, it does have US$162.7m in cash offsetting this, leading to net cash of US$78.6m.
How Healthy Is Aris Gold's Balance Sheet?
The latest balance sheet data shows that Aris Gold had liabilities of US$18.4m due within a year, and liabilities of US$150.3m falling due after that. Offsetting these obligations, it had cash of US$162.7m as well as receivables valued at US$3.41m due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.
Having regard to Aris Gold's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$172.0m company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Aris Gold also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Aris Gold 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.
In the last year Aris Gold wasn't profitable at an EBIT level, but managed to grow its revenue by 37%, to US$50m. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Aris Gold?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Aris Gold lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$8.6m of cash and made a loss of US$62m. With only US$78.6m on the balance sheet, it would appear that its going to need to raise capital again soon. Aris Gold's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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. To that end, you should be aware of the 2 warning signs we've spotted with Aris Gold .
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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