We Think Atalaya Mining (LON:ATYM) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Atalaya Mining

What Is Atalaya Mining's Debt?

As you can see below, at the end of June 2022, Atalaya Mining had €59.6m of debt, up from €55.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds €127.2m in cash, so it actually has €67.6m net cash.

A Look At Atalaya Mining's Liabilities

We can see from the most recent balance sheet that Atalaya Mining had liabilities of €91.1m falling due within a year, and liabilities of €79.5m due beyond that. Offsetting this, it had €127.2m in cash and €50.4m in receivables that were due within 12 months. So it actually has €7.01m more liquid assets than total liabilities.

This surplus suggests that Atalaya Mining has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Atalaya Mining has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, Atalaya Mining saw its EBIT drop by 4.4% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Atalaya Mining's ability to maintain a healthy balance sheet going forward. 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. Atalaya Mining may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Atalaya Mining recorded free cash flow worth 54% 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 €67.6m in net cash and a decent-looking balance sheet. So we are not troubled with Atalaya Mining's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Atalaya Mining has 1 warning sign we think you should be aware of.

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.