These 4 Measures Indicate That Alamos Gold (TSE:AGI) Is Using Debt Reasonably Well

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 Alamos Gold Inc. (TSE:AGI) makes use of debt. But is this debt a concern to shareholders?

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Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

What Is Alamos Gold's Debt?

As you can see below, at the end of December 2024, Alamos Gold had US$250.0m of debt, up from none a year ago. Click the image for more detail. However, it does have US$351.2m in cash offsetting this, leading to net cash of US$101.2m.

How Healthy Is Alamos Gold's Balance Sheet?

According to the last reported balance sheet, Alamos Gold had liabilities of US$430.9m due within 12 months, and liabilities of US$1.32b due beyond 12 months. Offsetting these obligations, it had cash of US$351.2m as well as receivables valued at US$46.7m due within 12 months. So its liabilities total US$1.35b more than the combination of its cash and short-term receivables.

Of course, Alamos Gold has a titanic market capitalization of US$10.3b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Alamos Gold boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for Alamos Gold

In addition to that, we're happy to report that Alamos Gold has boosted its EBIT by 53%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Alamos Gold's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts .

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Alamos Gold may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Alamos Gold's free cash flow amounted to 37% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While Alamos Gold does have more liabilities than liquid assets, it also has net cash of US$101.2m. And we liked the look of last year's 53% year-on-year EBIT growth. So we don't think Alamos Gold's use of debt is risky. We'd be motivated to research the stock further if we found out that Alamos Gold insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.

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. 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.