Is Aura Minerals (TSE:ORA) A Risky Investment?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Aura Minerals Inc. (TSE:ORA) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Aura Minerals

What Is Aura Minerals's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2021 Aura Minerals had debt of US$160.8m, up from US$70.4m in one year. But it also has US$162.6m in cash to offset that, meaning it has US$1.83m net cash.

How Strong Is Aura Minerals' Balance Sheet?

The latest balance sheet data shows that Aura Minerals had liabilities of US$146.6m due within a year, and liabilities of US$173.6m falling due after that. Offsetting these obligations, it had cash of US$162.6m as well as receivables valued at US$42.4m due within 12 months. So it has liabilities totalling US$115.2m more than its cash and near-term receivables, combined.

Given Aura Minerals has a market capitalization of US$686.6m, 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, Aura Minerals also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Aura Minerals has boosted its EBIT by 48%, thus reducing the spectre of future debt repayments. 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 Aura Minerals 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Aura Minerals has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, Aura Minerals recorded free cash flow of 38% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

Although Aura Minerals's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$1.83m. And it impressed us with its EBIT growth of 48% over the last year. So we don't think Aura Minerals's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 3 warning signs we've spotted with Aura Minerals .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.