We Think Ares Strategic Mining (CSE:ARS) Has A Fair Chunk Of Debt

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.' 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 can see that Ares Strategic Mining Inc. (CSE:ARS) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Ares Strategic Mining

What Is Ares Strategic Mining's Net Debt?

As you can see below, at the end of June 2023, Ares Strategic Mining had CA$6.35m of debt, up from CA$60.0k a year ago. Click the image for more detail. However, it also had CA$681.9k in cash, and so its net debt is CA$5.67m.

How Strong Is Ares Strategic Mining's Balance Sheet?

We can see from the most recent balance sheet that Ares Strategic Mining had liabilities of CA$2.44m falling due within a year, and liabilities of CA$4.63m due beyond that. Offsetting these obligations, it had cash of CA$681.9k as well as receivables valued at CA$231.9k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$6.15m.

While this might seem like a lot, it is not so bad since Ares Strategic Mining has a market capitalization of CA$25.7m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Ares Strategic Mining'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.

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

Caveat Emptor

Importantly, Ares Strategic Mining had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping CA$5.1m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CA$6.3m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. For instance, we've identified 5 warning signs for Ares Strategic Mining (4 are a bit unpleasant) you should be aware of.

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.