Adriatic Metals (ASX:ADT) Is Making Moderate Use Of Debt

Warren Buffett famously said, '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 note that Adriatic Metals PLC (ASX:ADT) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Adriatic Metals

What Is Adriatic Metals's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Adriatic Metals had debt of US$169.2m, up from US$140.3m in one year. However, because it has a cash reserve of US$58.8m, its net debt is less, at about US$110.5m.

How Strong Is Adriatic Metals' Balance Sheet?

According to the last reported balance sheet, Adriatic Metals had liabilities of US$72.4m due within 12 months, and liabilities of US$119.9m due beyond 12 months. Offsetting this, it had US$58.8m in cash and US$3.97m in receivables that were due within 12 months. So it has liabilities totalling US$129.5m more than its cash and near-term receivables, combined.

Since publicly traded Adriatic Metals shares are worth a total of US$657.0m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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 Adriatic Metals'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.

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

Caveat Emptor

Over the last twelve months Adriatic Metals produced an earnings before interest and tax (EBIT) loss. Indeed, it lost US$34m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$132m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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 Adriatic Metals has 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.