Does Azarga Metals (CVE:AZR) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Azarga Metals Corp. (CVE:AZR) makes use of debt. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out 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 Azarga Metals had CA$5.64m of debt in December 2021, down from CA$5.90m, one year before. However, because it has a cash reserve of CA$646.9k, its net debt is less, at about CA$4.99m.

How Strong Is Azarga Metals' Balance Sheet?

According to the last reported balance sheet, Azarga Metals had liabilities of CA$5.65m due within 12 months, and liabilities of CA$1.25m due beyond 12 months. Offsetting this, it had CA$646.9k in cash and CA$63.1k in receivables that were due within 12 months. So its liabilities total CA$6.19m more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's CA$5.22m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But it is Azarga Metals'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 Azarga Metals finds some valuable resources, before it runs out of money.

Caveat Emptor

Importantly, Azarga Metals had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CA$1.1m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of CA$1.0m over the last twelve months. That means it's on the risky side of things. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example Azarga Metals has 5 warning signs (and 4 which shouldn't be ignored) we think you should know about.

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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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.