Does Aurelia Metals (ASX:AMI) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Aurelia Metals Limited (ASX:AMI) does carry debt. But should shareholders be worried about its use of debt?

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 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Aurelia Metals

How Much Debt Does Aurelia Metals Carry?

You can click the graphic below for the historical numbers, but it shows that Aurelia Metals had AU$7.68m of debt in June 2023, down from AU$26.0m, one year before. However, it does have AU$38.9m in cash offsetting this, leading to net cash of AU$31.3m.

A Look At Aurelia Metals' Liabilities

The latest balance sheet data shows that Aurelia Metals had liabilities of AU$49.7m due within a year, and liabilities of AU$84.9m falling due after that. Offsetting this, it had AU$38.9m in cash and AU$28.9m in receivables that were due within 12 months. So its liabilities total AU$66.8m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Aurelia Metals is worth AU$160.1m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Aurelia Metals made a loss at the EBIT level, and saw its revenue drop to AU$369m, which is a fall of 16%. We would much prefer see growth.

So How Risky Is Aurelia Metals?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Aurelia Metals had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of AU$590k and booked a AU$52m accounting loss. With only AU$31.3m on the balance sheet, it would appear that its going to need to raise capital again 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. Case in point: We've spotted 1 warning sign for Aurelia Metals you should be aware of.

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.

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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.