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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Almaden Minerals Ltd. (TSE:AMM) makes use of debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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?
The image below, which you can click on for greater detail, shows that at September 2021 Almaden Minerals had debt of CA$3.14m, up from CA$2.88m in one year. However, it does have CA$11.4m in cash offsetting this, leading to net cash of CA$8.23m.
How Healthy Is Almaden Minerals' Balance Sheet?
The latest balance sheet data shows that Almaden Minerals had liabilities of CA$515.3k due within a year, and liabilities of CA$4.87m falling due after that. On the other hand, it had cash of CA$11.4m and CA$166.9k worth of receivables due within a year. So it can boast CA$6.14m more liquid assets than total liabilities.
This short term liquidity is a sign that Almaden Minerals could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Almaden Minerals boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Almaden Minerals 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.
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?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Almaden Minerals lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CA$4.0m and booked a CA$4.2m accounting loss. With only CA$8.23m 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with Almaden Minerals (including 1 which is potentially serious) .
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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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.