Minera Alamos (CVE:MAI) Has Debt But No Earnings; Should You Worry?

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. Importantly, Minera Alamos Inc. (CVE:MAI) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Minera Alamos

What Is Minera Alamos's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Minera Alamos had debt of CA$6.25m, up from none in one year. However, its balance sheet shows it holds CA$11.8m in cash, so it actually has CA$5.59m net cash.

How Healthy Is Minera Alamos' Balance Sheet?

The latest balance sheet data shows that Minera Alamos had liabilities of CA$5.13m due within a year, and liabilities of CA$6.08m falling due after that. Offsetting these obligations, it had cash of CA$11.8m as well as receivables valued at CA$2.02m due within 12 months. So it actually has CA$2.65m more liquid assets than total liabilities.

This short term liquidity is a sign that Minera Alamos could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Minera Alamos has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Minera Alamos 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.

In the last year Minera Alamos had a loss before interest and tax, and actually shrunk its revenue by 61%, to CA$9.1m. That makes us nervous, to say the least.

So How Risky Is Minera Alamos?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Minera Alamos lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CA$3.5m of cash and made a loss of CA$3.8m. Given it only has net cash of CA$5.59m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. We've identified 2 warning signs with Minera Alamos , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.