Warren Buffett famously said, '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. Importantly, Atico Mining Corporation (CVE:ATY) does carry debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Atico Mining's Net Debt?
The image below, which you can click on for greater detail, shows that Atico Mining had debt of US$5.73m at the end of September 2020, a reduction from US$6.65m over a year. However, it does have US$7.78m in cash offsetting this, leading to net cash of US$2.05m.
How Healthy Is Atico Mining's Balance Sheet?
The latest balance sheet data shows that Atico Mining had liabilities of US$16.4m due within a year, and liabilities of US$18.3m falling due after that. Offsetting this, it had US$7.78m in cash and US$4.73m in receivables that were due within 12 months. So its liabilities total US$22.1m more than the combination of its cash and short-term receivables.
Atico Mining has a market capitalization of US$49.5m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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.
On top of that, Atico Mining grew its EBIT by 54% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Atico Mining can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Atico Mining 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, Atico Mining recorded free cash flow worth 70% 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.
While Atico Mining does have more liabilities than liquid assets, it also has net cash of US$2.05m. And it impressed us with its EBIT growth of 54% over the last year. 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. For instance, we've identified 2 warning signs for Atico Mining that you should be aware of.
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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