Does Aeon Metals (ASX:AML) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, Aeon Metals Limited (ASX:AML) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Aeon Metals

How Much Debt Does Aeon Metals Carry?

As you can see below, at the end of December 2023, Aeon Metals had AU$39.4m of debt, up from AU$29.4m a year ago. Click the image for more detail. However, because it has a cash reserve of AU$1.27m, its net debt is less, at about AU$38.2m.

How Strong Is Aeon Metals' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Aeon Metals had liabilities of AU$40.2m due within 12 months and no liabilities due beyond that. On the other hand, it had cash of AU$1.27m and AU$34.0k worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$38.9m.

This deficit casts a shadow over the AU$11.0m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Aeon Metals would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Aeon Metals's earnings that will influence how the balance sheet holds up in the future. 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.

Since Aeon Metals has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.

Caveat Emptor

Over the last twelve months Aeon Metals produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping AU$7.8m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely, given it is low on liquid assets, and burned through AU$4.5m in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. 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. For example - Aeon Metals has 4 warning signs we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.