David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 note that Aranjin Resources Ltd. (CVE:ARJN) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Aranjin Resources
What Is Aranjin Resources's Net Debt?
As you can see below, at the end of September 2021, Aranjin Resources had CA$2.15m of debt, up from CA$703.9k a year ago. Click the image for more detail. However, it does have CA$918.2k in cash offsetting this, leading to net debt of about CA$1.23m.
A Look At Aranjin Resources' Liabilities
The latest balance sheet data shows that Aranjin Resources had liabilities of CA$2.36m due within a year, and liabilities of CA$738.0k falling due after that. Offsetting this, it had CA$918.2k in cash and CA$74.5k in receivables that were due within 12 months. So its liabilities total CA$2.11m more than the combination of its cash and short-term receivables.
This deficit isn't so bad because Aranjin Resources is worth CA$8.08m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But it is Aranjin Resources's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Given its lack of meaningful operating revenue, investors are probably hoping that Aranjin Resources finds some valuable resources, before it runs out of money.
Caveat Emptor
Importantly, Aranjin Resources had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping CA$830k. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CA$2.7m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very 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. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for Aranjin Resources you should know about.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.
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About TSXV:ARJN
Aranjin Resources
Engages in the exploration, development, and acquisition of mineral properties.
Moderate with mediocre balance sheet.
