Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. As with many other companies Almaden Minerals Ltd. (TSE:AMM) makes use of debt. But should shareholders be worried about its use of debt?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.
How Much Debt Does Almaden Minerals Carry?
The chart below, which you can click on for greater detail, shows that Almaden Minerals had CA$2.96m in debt in June 2021; about the same as the year before. But it also has CA$12.4m in cash to offset that, meaning it has CA$9.43m net cash.
How Strong Is Almaden Minerals' Balance Sheet?
We can see from the most recent balance sheet that Almaden Minerals had liabilities of CA$563.6k falling due within a year, and liabilities of CA$4.70m due beyond that. On the other hand, it had cash of CA$12.4m and CA$177.9k worth of receivables due within a year. So it actually has CA$7.29m more liquid assets than total liabilities.
This short term liquidity is a sign that Almaden Minerals could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Almaden Minerals boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Almaden Minerals will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Since Almaden Minerals has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.
So How Risky Is Almaden Minerals?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Almaden Minerals lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CA$3.3m and booked a CA$3.2m accounting loss. Given it only has net cash of CA$9.43m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. For example, we've discovered 3 warning signs for Almaden Minerals (1 can't be ignored!) that you should be aware of before investing here.
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.
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.
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