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.' 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 Aris Gold Corporation (TSE:ARIS) makes use of debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Aris Gold's Net Debt?
As you can see below, Aris Gold had US$86.1m of debt, at December 2021, which is about the same as the year before. You can click the chart for greater detail. But it also has US$138.0m in cash to offset that, meaning it has US$51.9m net cash.
How Strong Is Aris Gold's Balance Sheet?
According to the last reported balance sheet, Aris Gold had liabilities of US$22.6m due within 12 months, and liabilities of US$144.4m due beyond 12 months. Offsetting this, it had US$138.0m in cash and US$4.25m in receivables that were due within 12 months. So it has liabilities totalling US$24.7m more than its cash and near-term receivables, combined.
Given Aris Gold has a market capitalization of US$213.8m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Aris Gold also has more cash than debt, so we're pretty confident 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 Aris Gold 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.
Over 12 months, Aris Gold reported revenue of US$49m, which is a gain of 14%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
So How Risky Is Aris Gold?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Aris Gold lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$21m of cash and made a loss of US$1.6m. Given it only has net cash of US$51.9m, 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. For riskier companies like Aris Gold I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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.