Would Almonty Industries (TSE:AII) Be Better Off With Less 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.' 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. As with many other companies Almonty Industries Inc. (TSE:AII) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Almonty Industries

What Is Almonty Industries's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Almonty Industries had debt of CA$60.6m, up from CA$50.0m in one year. However, because it has a cash reserve of CA$1.41m, its net debt is less, at about CA$59.2m.

How Strong Is Almonty Industries's Balance Sheet?

According to the last reported balance sheet, Almonty Industries had liabilities of CA$64.7m due within 12 months, and liabilities of CA$48.3m due beyond 12 months. On the other hand, it had cash of CA$1.41m and CA$1.36m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$110.2m.

This deficit is considerable relative to its market capitalization of CA$135.8m, so it does suggest shareholders should keep an eye on Almonty Industries's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. 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$25m, which is a fall of 48%. That makes us nervous, to say the least.

Caveat Emptor

While Almonty Industries's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping CA$25m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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$7.3m of cash over the last year. So in short it's a really risky stock. 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. Consider risks, for instance. Every company has them, and we've spotted 1 warning sign for Almonty Industries you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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