Is AIC Mines (ASX:A1M) Using Debt Sensibly?

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 can see that AIC Mines Limited (ASX:A1M) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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, 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out 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 June 2023 AIC Mines had debt of AU$2.44m, up from none in one year. However, it does have AU$37.8m in cash offsetting this, leading to net cash of AU$35.3m.

How Healthy Is AIC Mines' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that AIC Mines had liabilities of AU$18.2m due within 12 months and liabilities of AU$22.2m due beyond that. Offsetting these obligations, it had cash of AU$37.8m as well as receivables valued at AU$519.0k due within 12 months. So its liabilities total AU$2.14m more than the combination of its cash and short-term receivables.

Having regard to AIC Mines' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the AU$127.2m company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, AIC Mines also has more cash than debt, so we're pretty confident it can manage its debt safely. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, AIC Mines made a loss at the EBIT level, and saw its revenue drop to AU$126m, which is a fall of 21%. To be frank that doesn't bode well.

So How Risky Is AIC Mines?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months AIC Mines lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through AU$37m of cash and made a loss of AU$5.8m. But the saving grace is the AU$35.3m on the balance sheet. That means it could keep spending at its current rate for more than two years. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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 be aware of the 2 warning signs we've spotted with AIC Mines .

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.