Is Adriatic Metals (ASX:ADT) Weighed On By Its Debt Load?

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. Importantly, Adriatic Metals PLC (ASX:ADT) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out the opportunities and risks within the AU Metals and Mining industry.

What Is Adriatic Metals's Debt?

The chart below, which you can click on for greater detail, shows that Adriatic Metals had US$16.1m in debt in June 2022; about the same as the year before. But on the other hand it also has US$83.4m in cash, leading to a US$67.4m net cash position.

A Look At Adriatic Metals' Liabilities

According to the last reported balance sheet, Adriatic Metals had liabilities of US$3.56m due within 12 months, and liabilities of US$20.3m due beyond 12 months. On the other hand, it had cash of US$83.4m and US$1.79m worth of receivables due within a year. So it can boast US$61.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Adriatic Metals could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Adriatic Metals boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. 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?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Adriatic Metals lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$33m and booked a US$17m accounting loss. But at least it has US$67.4m on the balance sheet to spend on growth, near-term. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Adriatic Metals (2 are a bit unpleasant) you should be aware of.

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.