Almonty Industries (TSE:AII) Is Carrying A Fair Bit Of Debt

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. Importantly, Almonty Industries Inc. (TSE:AII) does carry debt. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Almonty Industries

What Is Almonty Industries's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Almonty Industries had CA$132.7m of debt, an increase on CA$94.3m, over one year. However, it also had CA$7.64m in cash, and so its net debt is CA$125.0m.

How Strong Is Almonty Industries' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Almonty Industries had liabilities of CA$26.8m due within 12 months and liabilities of CA$154.1m due beyond that. Offsetting these obligations, it had cash of CA$7.64m as well as receivables valued at CA$3.39m due within 12 months. So it has liabilities totalling CA$169.9m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of CA$225.0m, so it does suggest shareholders should keep an eye on Almonty Industries' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Almonty Industries can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Almonty Industries wasn't profitable at an EBIT level, but managed to grow its revenue by 6.3%, to CA$26m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Almonty Industries had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CA$5.2m 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. 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$41m 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. Be aware that Almonty Industries is showing 2 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

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.