Here's Why Amani Gold (ASX:ANL) Can Afford Some Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Amani Gold Limited (ASX:ANL) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Amani Gold

What Is Amani Gold's Net Debt?

As you can see below, at the end of June 2020, Amani Gold had AU$3.09m of debt, up from none a year ago. Click the image for more detail. However, it also had AU$1.13m in cash, and so its net debt is AU$1.96m.

How Healthy Is Amani Gold's Balance Sheet?

The latest balance sheet data shows that Amani Gold had liabilities of AU$2.68m due within a year, and liabilities of AU$2.10m falling due after that. On the other hand, it had cash of AU$1.13m and AU$417.8k worth of receivables due within a year. So its liabilities total AU$3.23m more than the combination of its cash and short-term receivables.

Of course, Amani Gold has a market capitalization of AU$18.8m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Amani Gold will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Amani Gold reported revenue of AU$820k, which is a gain of 28,587%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

Caveat Emptor

Even though Amani Gold managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost a very considerable AU$4.1m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled AU$9.0m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. Be aware that Amani Gold is showing 6 warning signs in our investment analysis , and 4 of those are a bit concerning...

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.

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