Is Athabasca Minerals (CVE:AMI) Using Debt Sensibly?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Athabasca Minerals Inc. (CVE:AMI) 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Athabasca Minerals

What Is Athabasca Minerals's Net Debt?

As you can see below, at the end of September 2022, Athabasca Minerals had CA$7.78m of debt, up from CA$1.19m a year ago. Click the image for more detail. However, it does have CA$2.06m in cash offsetting this, leading to net debt of about CA$5.72m.

How Strong Is Athabasca Minerals' Balance Sheet?

The latest balance sheet data shows that Athabasca Minerals had liabilities of CA$11.3m due within a year, and liabilities of CA$22.6m falling due after that. Offsetting these obligations, it had cash of CA$2.06m as well as receivables valued at CA$6.51m due within 12 months. So its liabilities total CA$25.3m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CA$14.1m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Athabasca Minerals would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Athabasca Minerals will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Athabasca Minerals wasn't profitable at an EBIT level, but managed to grow its revenue by 216%, to CA$29m. That's virtually the hole-in-one of revenue growth!

Caveat Emptor

Despite the top line growth, Athabasca Minerals still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CA$7.4m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of CA$4.7m over the last twelve months. So suffice it to say we consider the stock to be 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 3 warning signs for Athabasca Minerals you should be aware of, and 1 of them doesn't sit too well with us.

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.