Here's Why Lithium Argentina (TSE:LAR) Can Afford Some Debt

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.' 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. We can see that Lithium Argentina AG (TSE:LAR) does use debt in its business. But the real question is whether this debt is making the company risky.

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When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Lithium Argentina's Net Debt?

The chart below, which you can click on for greater detail, shows that Lithium Argentina had US$210.5m in debt in December 2024; about the same as the year before. On the flip side, it has US$85.5m in cash leading to net debt of about US$125.0m.

A Look At Lithium Argentina's Liabilities

We can see from the most recent balance sheet that Lithium Argentina had liabilities of US$240.3m falling due within a year, and liabilities of US$21.0k due beyond that. On the other hand, it had cash of US$85.5m and US$31.9m worth of receivables due within a year. So its liabilities total US$122.9m more than the combination of its cash and short-term receivables.

Lithium Argentina has a market capitalization of US$350.6m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Lithium Argentina can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts .

Check out our latest analysis for Lithium Argentina

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

Caveat Emptor

Over the last twelve months Lithium Argentina produced an earnings before interest and tax (EBIT) loss. Indeed, it lost US$32m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$23m of cash over the last year. So suffice it to say we consider the stock very risky. 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. Case in point: We've spotted 1 warning sign for Lithium Argentina you should be aware of.

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.