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.’ 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. We can see that AM Resources Corp. (CVE:AMR) does use debt in its business. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company’s debt levels is to consider its cash and debt together.
How Much Debt Does AM Resources Carry?
The image below, which you can click on for greater detail, shows that at June 2019 AM Resources had debt of CA$951.2k, up from in one year. On the flip side, it has CA$141.4k in cash leading to net debt of about CA$809.8k.
How Strong Is AM Resources’s Balance Sheet?
According to the last reported balance sheet, AM Resources had liabilities of CA$1.54m due within 12 months, and liabilities of CA$42.3k due beyond 12 months. Offsetting this, it had CA$141.4k in cash and CA$495.8k in receivables that were due within 12 months. So its liabilities total CA$940.3k more than the combination of its cash and short-term receivables.
Given AM Resources has a market capitalization of CA$4.93m, it’s hard to believe these liabilities pose much threat. Having said that, it’s clear that we should continue to monitor its balance sheet, lest it change for the worse. There’s no doubt that we learn most about debt from the balance sheet. But you can’t view debt in total isolation; since AM Resources will need earnings to service that debt. So if you’re keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
In the last year AM Resources actually shrunk its revenue by 44%, to CA$1.5m. That makes us nervous, to say the least.
While AM Resources’s falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable CA$1.4m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CA$1.9m in negative free cash flow over the last twelve months. So in short it’s a really risky stock. For riskier companies like AM Resources I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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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