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

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Almaden Minerals Ltd. (TSE:AMM) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Almaden Minerals

What Is Almaden Minerals's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2022 Almaden Minerals had debt of CA$3.50m, up from CA$2.96m in one year. But on the other hand it also has CA$8.09m in cash, leading to a CA$4.59m net cash position.

How Healthy Is Almaden Minerals' Balance Sheet?

The latest balance sheet data shows that Almaden Minerals had liabilities of CA$587.7k due within a year, and liabilities of CA$6.26m falling due after that. On the other hand, it had cash of CA$8.09m and CA$104.9k worth of receivables due within a year. So it can boast CA$1.35m more liquid assets than total liabilities.

This surplus suggests that Almaden Minerals has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Almaden Minerals has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Almaden Minerals's ability to maintain a healthy balance sheet going forward. 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?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Almaden Minerals had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CA$4.2m and booked a CA$3.4m accounting loss. Given it only has net cash of CA$4.59m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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 2 warning signs for Almaden Minerals (1 is significant!) that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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.