Is Aurcana Silver (CVE:AUN) A Risky Investment?

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 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. We note that Aurcana Silver Corporation (CVE:AUN) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Aurcana Silver

What Is Aurcana Silver's Net Debt?

As you can see below, at the end of December 2020, Aurcana Silver had US$19.7m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds US$29.7m in cash, so it actually has US$9.95m net cash.

How Healthy Is Aurcana Silver's Balance Sheet?

We can see from the most recent balance sheet that Aurcana Silver had liabilities of US$3.72m falling due within a year, and liabilities of US$31.6m due beyond that. On the other hand, it had cash of US$29.7m and US$25.9k worth of receivables due within a year. So it has liabilities totalling US$5.60m more than its cash and near-term receivables, combined.

Of course, Aurcana Silver has a market capitalization of US$172.4m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Aurcana Silver also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Aurcana Silver'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.

Since Aurcana Silver has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.

So How Risky Is Aurcana Silver?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Aurcana Silver had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$22m and booked a US$17m accounting loss. With only US$9.95m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Aurcana Silver (1 is a bit concerning) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. 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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