Is AIC Mines (ASX:A1M) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that AIC Mines Limited (ASX:A1M) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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, 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for AIC Mines

How Much Debt Does AIC Mines Carry?

The image below, which you can click on for greater detail, shows that at December 2023 AIC Mines had debt of AU$7.38m, up from AU$2.44m in one year. However, it does have AU$36.3m in cash offsetting this, leading to net cash of AU$28.9m.

A Look At AIC Mines' Liabilities

The latest balance sheet data shows that AIC Mines had liabilities of AU$20.7m due within a year, and liabilities of AU$23.9m falling due after that. Offsetting these obligations, it had cash of AU$36.3m as well as receivables valued at AU$1.12m due within 12 months. So it has liabilities totalling AU$7.14m more than its cash and near-term receivables, combined.

Since publicly traded AIC Mines shares are worth a total of AU$212.7m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, AIC Mines boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that AIC Mines's load is not too heavy, because its EBIT was down 76% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine AIC Mines's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While AIC Mines has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, AIC Mines burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

We could understand if investors are concerned about AIC Mines's liabilities, but we can be reassured by the fact it has has net cash of AU$28.9m. So although we see some areas for improvement, we're not too worried about AIC Mines's balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that AIC Mines is showing 3 warning signs in our investment analysis , and 1 of those is potentially serious...

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.

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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.