Is Admiralty Resources (ASX:ADY) Using Debt Sensibly?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Admiralty Resources NL (ASX:ADY) does use debt in its business. But the more important question is: how much risk is that debt creating?

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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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Admiralty Resources Carry?

As you can see below, at the end of December 2024, Admiralty Resources had AU$17.8m of debt, up from AU$16.2m a year ago. Click the image for more detail. On the flip side, it has AU$3.45m in cash leading to net debt of about AU$14.3m.

A Look At Admiralty Resources' Liabilities

We can see from the most recent balance sheet that Admiralty Resources had liabilities of AU$17.9m falling due within a year, and liabilities of AU$322.6k due beyond that. Offsetting these obligations, it had cash of AU$3.45m as well as receivables valued at AU$592.6k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$14.2m.

Given this deficit is actually higher than the company's market capitalization of AU$10.5m, we think shareholders really should watch Admiralty Resources's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Admiralty 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.

See our latest analysis for Admiralty Resources

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

Caveat Emptor

Over the last twelve months Admiralty Resources produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping AU$1.2m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of AU$3.4m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. 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 5 warning signs we've spotted with Admiralty Resources .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.