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

Warren Buffett famously said, '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 Almaden Minerals Ltd. (TSE:AMM) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. 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 December 2022, Almaden Minerals had CA$3.93m of debt, up from CA$3.23m a year ago. Click the image for more detail. But it also has CA$6.66m in cash to offset that, meaning it has CA$2.73m net cash.

A Look At Almaden Minerals' Liabilities

Zooming in on the latest balance sheet data, we can see that Almaden Minerals had liabilities of CA$428.8k due within 12 months and liabilities of CA$7.81m due beyond that. On the other hand, it had cash of CA$6.66m and CA$198.9k worth of receivables due within a year. So its liabilities total CA$1.38m more than the combination of its cash and short-term receivables.

Given Almaden Minerals has a market capitalization of CA$31.6m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Almaden Minerals also has more cash than debt, so we're pretty confident 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 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?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Almaden Minerals lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CA$3.4m of cash and made a loss of CA$12m. Given it only has net cash of CA$2.73m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Almaden Minerals (of which 2 are a bit unpleasant!) you should know about.

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.

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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.