Is American Pacific Mining (CSE:USGD) Weighed On By Its Debt Load?

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 American Pacific Mining Corp. (CSE:USGD) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for American Pacific Mining

What Is American Pacific Mining's Debt?

As you can see below, at the end of June 2023, American Pacific Mining had CA$4.02m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds CA$5.92m in cash, so it actually has CA$1.90m net cash.

A Look At American Pacific Mining's Liabilities

Zooming in on the latest balance sheet data, we can see that American Pacific Mining had liabilities of CA$7.03m due within 12 months and liabilities of CA$949.1k due beyond that. Offsetting this, it had CA$5.92m in cash and CA$43.2k in receivables that were due within 12 months. So it has liabilities totalling CA$2.01m more than its cash and near-term receivables, combined.

Of course, American Pacific Mining has a market capitalization of CA$50.1m, 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. While it does have liabilities worth noting, American Pacific Mining also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since American Pacific Mining 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.

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

So How Risky Is American Pacific Mining?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year American Pacific Mining had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CA$9.2m and booked a CA$11m accounting loss. Given it only has net cash of CA$1.90m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 5 warning signs we've spotted with American Pacific Mining (including 4 which shouldn't be ignored) .

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.