Is Ascot Resources (TSE:AOT) Using Debt In A Risky Way?

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 Ascot Resources Ltd. (TSE:AOT) makes use of debt. 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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Ascot Resources

How Much Debt Does Ascot Resources Carry?

As you can see below, at the end of September 2021, Ascot Resources had CA$41.5m of debt, up from CA$13.4m a year ago. Click the image for more detail. However, it does have CA$90.0m in cash offsetting this, leading to net cash of CA$48.5m.

A Look At Ascot Resources' Liabilities

The latest balance sheet data shows that Ascot Resources had liabilities of CA$12.7m due within a year, and liabilities of CA$61.9m falling due after that. Offsetting these obligations, it had cash of CA$90.0m as well as receivables valued at CA$949.0k due within 12 months. So it can boast CA$16.3m more liquid assets than total liabilities.

This surplus suggests that Ascot Resources has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Ascot Resources 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 it is future earnings, more than anything, that will determine Ascot Resources'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.

Since Ascot Resources has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.

So How Risky Is Ascot Resources?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Ascot Resources had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CA$42m of cash and made a loss of CA$7.2m. With only CA$48.5m on the balance sheet, it would appear that its going to need to raise capital again 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. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Ascot Resources (at least 2 which are a bit concerning) , and understanding them should be part of your investment process.

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.

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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.