Is Aeris Resources (ASX:AIS) Weighed On By Its Debt Load?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Aeris Resources Limited (ASX:AIS) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Aeris Resources

How Much Debt Does Aeris Resources Carry?

As you can see below, at the end of December 2023, Aeris Resources had AU$39.1m of debt, up from AU$338.0k a year ago. Click the image for more detail. However, it does have AU$23.0m in cash offsetting this, leading to net debt of about AU$16.2m.

How Healthy Is Aeris Resources' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Aeris Resources had liabilities of AU$122.8m due within 12 months and liabilities of AU$178.9m due beyond that. Offsetting these obligations, it had cash of AU$23.0m as well as receivables valued at AU$27.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$251.1m.

Given this deficit is actually higher than the company's market capitalization of AU$203.2m, we think shareholders really should watch Aeris Resources's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Aeris Resources'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.

In the last year Aeris Resources wasn't profitable at an EBIT level, but managed to grow its revenue by 18%, to AU$589m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Aeris Resources had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable AU$90m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of AU$97m over the last twelve months. So suffice it to say we consider the stock to be 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. Case in point: We've spotted 3 warning signs for Aeris Resources you should be aware of, and 1 of them is significant.

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.