Almaden Minerals (TSE:AMM) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Almaden Minerals Ltd. (TSE:AMM) 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. 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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Almaden Minerals

What Is Almaden Minerals's Debt?

As you can see below, at the end of September 2021, Almaden Minerals had CA$3.14m of debt, up from CA$2.88m a year ago. Click the image for more detail. But on the other hand it also has CA$11.4m in cash, leading to a CA$8.23m net cash position.

A Look At Almaden Minerals' Liabilities

We can see from the most recent balance sheet that Almaden Minerals had liabilities of CA$515.3k falling due within a year, and liabilities of CA$4.87m due beyond that. Offsetting this, it had CA$11.4m in cash and CA$166.9k in receivables that were due within 12 months. So it can boast CA$6.14m 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. Simply put, the fact that Almaden Minerals has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Almaden Minerals can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Given its lack of meaningful operating revenue, investors are probably hoping that Almaden Minerals finds some valuable resources, before it runs out of money.

So How Risky Is Almaden Minerals?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Almaden Minerals had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CA$4.0m of cash and made a loss of CA$4.2m. With only CA$8.23m on the balance sheet, it would appear that its going to need to raise capital again 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Almaden Minerals (1 makes us a bit uncomfortable!) 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.