Aurelia Metals (ASX:AMI) Has Debt But No Earnings; Should You Worry?

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. As with many other companies Aurelia Metals Limited (ASX:AMI) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

See our latest analysis for Aurelia Metals

What Is Aurelia Metals's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Aurelia Metals had AU$19.3m of debt in December 2022, down from AU$26.8m, one year before. However, its balance sheet shows it holds AU$23.7m in cash, so it actually has AU$4.48m net cash.

How Healthy Is Aurelia Metals' Balance Sheet?

The latest balance sheet data shows that Aurelia Metals had liabilities of AU$84.3m due within a year, and liabilities of AU$88.3m falling due after that. Offsetting this, it had AU$23.7m in cash and AU$39.7m in receivables that were due within 12 months. So its liabilities total AU$109.2m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of AU$154.7m, so it does suggest shareholders should keep an eye on Aurelia Metals' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, Aurelia Metals boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Aurelia Metals can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Aurelia Metals had a loss before interest and tax, and actually shrunk its revenue by 11%, to AU$396m. We would much prefer see growth.

So How Risky Is Aurelia Metals?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Aurelia Metals lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of AU$24m and booked a AU$119m accounting loss. Given it only has net cash of AU$4.48m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. We've identified 1 warning sign with Aurelia Metals , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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.