Atalaya Mining (LON:ATYM) Could Easily Take On More 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Atalaya Mining Plc (LON:ATYM) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Atalaya Mining

What Is Atalaya Mining's Debt?

You can click the graphic below for the historical numbers, but it shows that Atalaya Mining had €41.6m of debt in March 2022, down from €53.0m, one year before. However, it does have €128.5m in cash offsetting this, leading to net cash of €86.9m.

How Strong Is Atalaya Mining's Balance Sheet?

According to the last reported balance sheet, Atalaya Mining had liabilities of €87.6m due within 12 months, and liabilities of €69.0m due beyond 12 months. Offsetting these obligations, it had cash of €128.5m as well as receivables valued at €37.1m due within 12 months. So it can boast €9.06m more liquid assets than total liabilities.

Having regard to Atalaya Mining's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the €546.4m company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Atalaya Mining boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Atalaya Mining grew its EBIT by 102% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Atalaya Mining can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Atalaya Mining has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Atalaya Mining recorded free cash flow worth 61% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case Atalaya Mining has €86.9m in net cash and a decent-looking balance sheet. And we liked the look of last year's 102% year-on-year EBIT growth. So we don't think Atalaya Mining's use of debt is risky. 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. For example - Atalaya Mining has 1 warning sign we think you should be aware of.

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. 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.