Is Aus Tin Mining (ASX:ANW) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Aus Tin Mining Limited (ASX:ANW) makes use of debt. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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.

View our latest analysis for Aus Tin Mining

What Is Aus Tin Mining's Debt?

The image below, which you can click on for greater detail, shows that Aus Tin Mining had debt of AU$2.18m at the end of December 2020, a reduction from AU$2.90m over a year. However, it also had AU$198.5k in cash, and so its net debt is AU$1.98m.

How Healthy Is Aus Tin Mining's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Aus Tin Mining had liabilities of AU$4.42m due within 12 months and liabilities of AU$628.3k due beyond that. Offsetting these obligations, it had cash of AU$198.5k as well as receivables valued at AU$21.6k due within 12 months. So it has liabilities totalling AU$4.83m more than its cash and near-term receivables, combined.

Aus Tin Mining has a market capitalization of AU$12.7m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Aus Tin Mining will need earnings to service that debt. 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.

Given its lack of meaningful operating revenue, investors are probably hoping that Aus Tin Mining finds some valuable resources, before it runs out of money.

Caveat Emptor

While Aus Tin Mining's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable AU$1.5m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled AU$759k in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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 instance, we've identified 6 warning signs for Aus Tin Mining (5 are a bit concerning) you should be aware of.

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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This article by Simply Wall St is general in nature. 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.
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