Does Lithium Americas (Argentina) (TSE:LAAC) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Lithium Americas (Argentina) Corp. (TSE:LAAC) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Lithium Americas (Argentina)

What Is Lithium Americas (Argentina)'s Debt?

The chart below, which you can click on for greater detail, shows that Lithium Americas (Argentina) had US$201.5m in debt in June 2024; about the same as the year before. However, because it has a cash reserve of US$96.2m, its net debt is less, at about US$105.3m.

How Healthy Is Lithium Americas (Argentina)'s Balance Sheet?

We can see from the most recent balance sheet that Lithium Americas (Argentina) had liabilities of US$221.8m falling due within a year, and liabilities of US$367.0k due beyond that. Offsetting this, it had US$96.2m in cash and US$16.1m in receivables that were due within 12 months. So its liabilities total US$109.8m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Lithium Americas (Argentina) has a market capitalization of US$423.5m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Lithium Americas (Argentina) 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.

Since Lithium Americas (Argentina) has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.

Caveat Emptor

Importantly, Lithium Americas (Argentina) had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable US$49m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$43m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Lithium Americas (Argentina) is showing 1 warning sign in our investment analysis , you should know about...

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.