Atico Mining (CVE:ATY) Has A Rock Solid Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Atico Mining Corporation (CVE:ATY) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Atico Mining

What Is Atico Mining's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2021 Atico Mining had debt of US$7.40m, up from US$6.32m in one year. But on the other hand it also has US$16.6m in cash, leading to a US$9.22m net cash position.

How Healthy Is Atico Mining's Balance Sheet?

We can see from the most recent balance sheet that Atico Mining had liabilities of US$12.0m falling due within a year, and liabilities of US$24.7m due beyond that. Offsetting these obligations, it had cash of US$16.6m as well as receivables valued at US$5.55m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$14.6m.

While this might seem like a lot, it is not so bad since Atico Mining has a market capitalization of US$60.9m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Atico Mining also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Atico Mining grew its EBIT by 144% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Atico Mining 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 company can only pay off debt with cold hard cash, not accounting profits. While Atico Mining 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, Atico Mining 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 Atico Mining does have more liabilities than liquid assets, it also has net cash of US$9.22m. And we liked the look of last year's 144% year-on-year EBIT growth. So we don't think Atico Mining's use of debt is risky. 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. We've identified 2 warning signs with Atico Mining , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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