Is AfriTin Mining (LON:ATM) Using Too Much Debt?

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.' 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. We can see that AfriTin Mining Limited (LON:ATM) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 AfriTin Mining

How Much Debt Does AfriTin Mining Carry?

The image below, which you can click on for greater detail, shows that at August 2020 AfriTin Mining had debt of UK£2.52m, up from UK£85.5k in one year. But on the other hand it also has UK£2.58m in cash, leading to a UK£61.1k net cash position.

How Healthy Is AfriTin Mining's Balance Sheet?

According to the last reported balance sheet, AfriTin Mining had liabilities of UK£3.45m due within 12 months, and liabilities of UK£221.5k due beyond 12 months. Offsetting this, it had UK£2.58m in cash and UK£362.8k in receivables that were due within 12 months. So it has liabilities totalling UK£734.6k more than its cash and near-term receivables, combined.

Given AfriTin Mining has a market capitalization of UK£24.4m, it's hard to believe these liabilities pose much threat. 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, AfriTin Mining 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 ultimately the future profitability of the business will decide if AfriTin Mining can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, AfriTin Mining reported revenue of UK£1.2m, which is a gain of 9,909%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!

So How Risky Is AfriTin Mining?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that AfriTin Mining had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through UK£6.6m of cash and made a loss of UK£2.2m. With only UK£61.1k on the balance sheet, it would appear that its going to need to raise capital again soon. The good news for shareholders is that AfriTin Mining has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 6 warning signs with AfriTin Mining (at least 2 which are potentially serious) , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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