Is Almaden Minerals (TSE:AMM) Using Too Much Debt?

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.' 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. As with many other companies Almaden Minerals Ltd. (TSE:AMM) makes use of debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

View our latest analysis for Almaden Minerals

What Is Almaden Minerals's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 Almaden Minerals had CA$3.29m of debt, an increase on CA$2.90m, over one year. But it also has CA$9.08m in cash to offset that, meaning it has CA$5.79m net cash.

How Healthy Is Almaden Minerals' Balance Sheet?

According to the last reported balance sheet, Almaden Minerals had liabilities of CA$556.7k due within 12 months, and liabilities of CA$6.65m due beyond 12 months. Offsetting these obligations, it had cash of CA$9.08m as well as receivables valued at CA$180.5k due within 12 months. So it actually has CA$2.05m 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Almaden Minerals can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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 we do note that Almaden Minerals had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CA$4.7m and booked a CA$2.8m accounting loss. With only CA$5.79m 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. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with Almaden Minerals (including 1 which makes us a bit uncomfortable) .

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.