David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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, Amani Gold Limited (ASX:ANL) does carry debt. But is this debt a concern to shareholders?
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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.
How Much Debt Does Amani Gold Carry?
The chart below, which you can click on for greater detail, shows that Amani Gold had AU$2.10m in debt in December 2021; about the same as the year before. However, its balance sheet shows it holds AU$9.03m in cash, so it actually has AU$6.93m net cash.
A Look At Amani Gold's Liabilities
Zooming in on the latest balance sheet data, we can see that Amani Gold had liabilities of AU$3.37m due within 12 months and liabilities of -AU$300.0k due beyond that. Offsetting this, it had AU$9.03m in cash and AU$64.1k in receivables that were due within 12 months. So it actually has AU$6.02m more liquid assets than total liabilities.
This surplus suggests that Amani Gold is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Amani Gold boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Amani Gold's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Given its lack of meaningful operating revenue, investors are probably hoping that Amani Gold finds some valuable resources, before it runs out of money.
So How Risky Is Amani Gold?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Amani Gold had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through AU$5.6m of cash and made a loss of AU$2.7m. Given it only has net cash of AU$6.93m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 5 warning signs for Amani Gold you should be aware of, and 3 of them shouldn't be ignored.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.