Auditors Are Concerned About Azarga Metals (CVE:AZR)

When Azarga Metals Corp. (CVE:AZR) reported its results to September 2021 its auditors, Davidson & Company could not be sure that it would be able to continue as a going concern in the next year. This means that, based on the financial results to that date, the company arguably should raise capital, or otherwise strengthen the balance sheet, as soon as possible.

Given its situation, it may not be in a good position to raise capital on favorable terms. So current risks on the balance sheet could have a big impact on how shareholders fare from here. The biggest concern we would have is the company's debt, since its lenders might force the company into administration if it cannot repay them.

View our latest analysis for Azarga Metals

What Is Azarga Metals's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Azarga Metals had CA$6.13m of debt, an increase on CA$5.69m, over one year. However, because it has a cash reserve of CA$862.9k, its net debt is less, at about CA$5.26m.

How Strong Is Azarga Metals' Balance Sheet?

The latest balance sheet data shows that Azarga Metals had liabilities of CA$260.7k due within a year, and liabilities of CA$6.13m falling due after that. On the other hand, it had cash of CA$862.9k and CA$74.9k worth of receivables due within a year. So its liabilities total CA$5.45m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of CA$7.18m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Azarga Metals 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.

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

Caveat Emptor

Over the last twelve months Azarga Metals produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping CA$926k. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CA$1.0m in negative free cash flow over the last twelve months. So in short it's a really risky stock. We prefer to avoid a company after its auditor has expressed any uncertainty about its ability to continue as a going concern. That's because we find it more comfortable to invest in companies that always keep the balance sheet reasonably strong. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 6 warning signs with Azarga Metals (at least 4 which make us uncomfortable) , and understanding them should be part of your investment process.

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.