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

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.' 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. We can see that Aurelia Metals Limited (ASX:AMI) does use debt in its business. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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?

The image below, which you can click on for greater detail, shows that Aurelia Metals had debt of AU$8.08m at the end of December 2023, a reduction from AU$19.3m over a year. But it also has AU$108.7m in cash to offset that, meaning it has AU$100.6m net cash.

A Look At Aurelia Metals' Liabilities

The latest balance sheet data shows that Aurelia Metals had liabilities of AU$58.1m due within a year, and liabilities of AU$74.7m falling due after that. Offsetting these obligations, it had cash of AU$108.7m as well as receivables valued at AU$24.8m due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Aurelia Metals' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the AU$261.9m company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Aurelia Metals has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Aurelia Metals'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 Aurelia Metals had a loss before interest and tax, and actually shrunk its revenue by 18%, to AU$324m. That's not what we would hope to see.

So How Risky Is Aurelia Metals?

Although Aurelia Metals had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of AU$28m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Aurelia Metals you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.