We Think Audalia Resources (ASX:ACP) Has A Fair Chunk Of Debt

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.' 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 Audalia Resources Limited (ASX:ACP) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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.

Check out our latest analysis for Audalia Resources

How Much Debt Does Audalia Resources Carry?

The image below, which you can click on for greater detail, shows that at June 2023 Audalia Resources had debt of AU$5.33m, up from AU$4.70m in one year. However, because it has a cash reserve of AU$410.8k, its net debt is less, at about AU$4.92m.

How Strong Is Audalia Resources' Balance Sheet?

The latest balance sheet data shows that Audalia Resources had liabilities of AU$9.14m due within a year, and liabilities of AU$16.0k falling due after that. On the other hand, it had cash of AU$410.8k and AU$49.3k worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$8.70m.

This deficit is considerable relative to its market capitalization of AU$11.1m, so it does suggest shareholders should keep an eye on Audalia Resources' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Audalia 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.

Given its lack of meaningful operating revenue, investors are probably hoping that Audalia Resources finds some valuable resources, before it runs out of money.

Caveat Emptor

Over the last twelve months Audalia Resources produced an earnings before interest and tax (EBIT) loss. Indeed, it lost AU$384k 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 AU$857k in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. For example, we've discovered 5 warning signs for Audalia Resources that you should be aware of before investing here.

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.

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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.