Lithium Americas (Argentina) (TSE:LAAC) Is Carrying A Fair Bit Of 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.' 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. Importantly, Lithium Americas (Argentina) Corp. (TSE:LAAC) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Lithium Americas (Argentina)

What Is Lithium Americas (Argentina)'s Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Lithium Americas (Argentina) had US$205.4m of debt, an increase on US$197.0m, over one year. On the flip side, it has US$92.3m in cash leading to net debt of about US$113.1m.

A Look At Lithium Americas (Argentina)'s Liabilities

According to the balance sheet data, Lithium Americas (Argentina) had liabilities of US$228.1m due within 12 months, but no longer term liabilities. Offsetting this, it had US$92.3m in cash and US$19.4m in receivables that were due within 12 months. So it has liabilities totalling US$116.4m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Lithium Americas (Argentina) has a market capitalization of US$439.9m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 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.

Given its lack of meaningful operating revenue, investors are probably hoping that Lithium Americas (Argentina) finds some valuable resources, before it runs out of money.

Caveat Emptor

Over the last twelve months Lithium Americas (Argentina) produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping US$50m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled US$35m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Lithium Americas (Argentina) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.