Stock Analysis

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

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TSXV:AFM
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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.' 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 Alphamin Resources Corp. (CVE:AFM) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at 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$4.94m at the end of June 2022, a reduction from US$47.0m over a year. However, it does have US$147.1m in cash offsetting this, leading to net cash of US$142.2m.

debt-equity-history-analysis
TSXV:AFM Debt to Equity History September 3rd 2022

A Look At Alphamin Resources' Liabilities

The latest balance sheet data shows that Alphamin Resources had liabilities of US$81.1m due within a year, and liabilities of US$28.7m falling due after that. On the other hand, it had cash of US$147.1m and US$40.3m worth of receivables due within a year. So it can boast US$77.6m more liquid assets than total liabilities.

This short term liquidity is a sign that Alphamin Resources could probably pay off its debt with ease, as its balance sheet is far from stretched. 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 249% over twelve months. That boost will make it even easier to pay down debt going forward. 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 Alphamin Resources 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 three years, Alphamin Resources recorded free cash flow worth 67% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Alphamin Resources has net cash of US$142.2m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 249% over the last year. So we don't think Alphamin Resources's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Alphamin Resources that you should be aware of before investing here.

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.

Valuation is complex, but we're helping make it simple.

Find out whether Alphamin Resources is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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About TSXV:AFM

Alphamin Resources

Alphamin Resources Corp., together with its subsidiaries, engages in the extraction, production, and sale of tin concentrates in the Democratic Republic of the Congo.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation4
Future Growth1
Past Performance6
Financial Health5
Dividends4

Read more about these checks in the individual report sections or in our analysis model.

Outstanding track record with excellent balance sheet and pays a dividend.