Is Alphamin Resources (CVE:AFM) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Alphamin Resources Corp. (CVE:AFM) makes use of debt. 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 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Alphamin Resources

What Is Alphamin Resources's Net Debt?

The image below, which you can click on for greater detail, shows that Alphamin Resources had debt of US$4.42m at the end of December 2022, a reduction from US$17.0m over a year. However, its balance sheet shows it holds US$119.4m in cash, so it actually has US$115.0m net cash.

A Look At Alphamin Resources' Liabilities

We can see from the most recent balance sheet that Alphamin Resources had liabilities of US$90.3m falling due within a year, and liabilities of US$32.4m due beyond that. Offsetting these obligations, it had cash of US$119.4m as well as receivables valued at US$33.4m due within 12 months. So it can boast US$30.1m more liquid assets than total liabilities.

This surplus suggests that Alphamin Resources has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Alphamin Resources boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Alphamin Resources grew its EBIT at 13% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Alphamin Resources's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Alphamin Resources 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. During the last three years, Alphamin Resources produced sturdy free cash flow equating to 68% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Alphamin Resources has US$115.0m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 68% of that EBIT to free cash flow, bringing in US$133m. So is Alphamin Resources's debt a risk? It doesn't seem so to us. 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. For example, we've discovered 1 warning sign for Alphamin Resources that you should be aware of before investing here.

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.