Is Adriatic Metals (ASX:ADT) A Risky Investment?

Warren Buffett famously said, '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 note that Adriatic Metals PLC (ASX:ADT) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Adriatic Metals

How Much Debt Does Adriatic Metals Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Adriatic Metals had US$42.5m of debt, an increase on US$16.1m, over one year. But it also has US$60.6m in cash to offset that, meaning it has US$18.1m net cash.

How Healthy Is Adriatic Metals' Balance Sheet?

The latest balance sheet data shows that Adriatic Metals had liabilities of US$7.72m due within a year, and liabilities of US$59.1m falling due after that. Offsetting these obligations, it had cash of US$60.6m as well as receivables valued at US$1.71m due within 12 months. So it has liabilities totalling US$4.53m more than its cash and near-term receivables, combined.

Having regard to Adriatic Metals' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$593.3m company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Adriatic Metals also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Adriatic Metals can strengthen its balance sheet over time. 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.

So How Risky Is Adriatic Metals?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Adriatic Metals had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$70m of cash and made a loss of US$47m. But at least it has US$18.1m on the balance sheet to spend on growth, near-term. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Adriatic Metals has 3 warning signs (and 2 which can't be ignored) 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.

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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.