Is Almonty Industries (TSE:AII) Using Debt Sensibly?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Almonty Industries Inc. (TSE:AII) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Almonty Industries

What Is Almonty Industries's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Almonty Industries had CA$94.3m of debt, an increase on CA$67.6m, over one year. However, it also had CA$5.73m in cash, and so its net debt is CA$88.6m.

A Look At Almonty Industries' Liabilities

According to the last reported balance sheet, Almonty Industries had liabilities of CA$56.7m due within 12 months, and liabilities of CA$87.6m due beyond 12 months. Offsetting this, it had CA$5.73m in cash and CA$2.57m in receivables that were due within 12 months. So it has liabilities totalling CA$136.0m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of CA$118.6m, we think shareholders really should watch Almonty Industries's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Almonty Industries's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Almonty Industries made a loss at the EBIT level, and saw its revenue drop to CA$24m, which is a fall of 2.2%. We would much prefer see growth.

Caveat Emptor

Importantly, Almonty Industries had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CA$8.9m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of CA$33m over the last twelve months. So suffice it to say we consider the stock to be 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 example - Almonty Industries has 2 warning signs we think 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.