Is Alphamin Resources (CVE:AFM) Using Too Much Debt?

Warren Buffett famously said, '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. We note that Alphamin Resources Corp. (CVE:AFM) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Alphamin Resources

What Is Alphamin Resources's Debt?

You can click the graphic below for the historical numbers, but it shows that Alphamin Resources had US$17.0m of debt in December 2021, down from US$60.6m, one year before. But it also has US$90.6m in cash to offset that, meaning it has US$73.6m net cash.

How Strong Is Alphamin Resources' Balance Sheet?

The latest balance sheet data shows that Alphamin Resources had liabilities of US$79.2m due within a year, and liabilities of US$31.3m falling due after that. Offsetting this, it had US$90.6m in cash and US$51.9m in receivables that were due within 12 months. So it can boast US$32.2m 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. Simply put, the fact that Alphamin Resources has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Alphamin Resources grew its EBIT by 545% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Alphamin Resources may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent two years, Alphamin Resources recorded free cash flow worth 66% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Alphamin Resources has net cash of US$73.6m, as well as more liquid assets than liabilities. And we liked the look of last year's 545% year-on-year EBIT growth. So is Alphamin Resources's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 3 warning signs for Alphamin Resources 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.