Would American Pacific Mining (CSE:USGD) Be Better Off With Less Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 American Pacific Mining Corp. (CSE:USGD) 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. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for American Pacific Mining

What Is American Pacific Mining's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 American Pacific Mining had CA$8.36m of debt, an increase on none, over one year. However, it does have CA$3.16m in cash offsetting this, leading to net debt of about CA$5.21m.

How Healthy Is American Pacific Mining's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that American Pacific Mining had liabilities of CA$10.9m due within 12 months and liabilities of CA$773.6k due beyond that. Offsetting these obligations, it had cash of CA$3.16m as well as receivables valued at CA$960.7k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$7.57m.

Since publicly traded American Pacific Mining shares are worth a total of CA$47.2m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since American Pacific 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 American Pacific Mining finds some valuable resources, before it runs out of money.

Caveat Emptor

Importantly, American Pacific Mining had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CA$12m 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. However, it doesn't help that it burned through CA$14m of cash over the last year. So suffice it to say we consider the stock very risky. 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. For instance, we've identified 6 warning signs for American Pacific Mining (3 are significant) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.