Is Anglesey Mining (LON:AYM) Using Debt Sensibly?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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, Anglesey Mining plc (LON:AYM) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Anglesey Mining

What Is Anglesey Mining's Net Debt?

As you can see below, Anglesey Mining had UK£3.96m of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have UK£283.3k in cash offsetting this, leading to net debt of about UK£3.68m.

How Healthy Is Anglesey Mining's Balance Sheet?

According to the last reported balance sheet, Anglesey Mining had liabilities of UK£261.0k due within 12 months, and liabilities of UK£4.01m due beyond 12 months. Offsetting this, it had UK£283.3k in cash and UK£40.9k in receivables that were due within 12 months. So it has liabilities totalling UK£3.95m more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's UK£2.91m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Anglesey Mining 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.

Given its lack of meaningful operating revenue, investors are probably hoping that Anglesey Mining finds some valuable resources, before it runs out of money.

Caveat Emptor

Over the last twelve months Anglesey Mining produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping UK£758k. When we look at that alongside the significant liabilities, we're not particularly confident 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 UK£1.2m over the last twelve months. So suffice it to say we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 5 warning signs for Anglesey Mining you should be aware of, and 3 of them don't sit too well with us.

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.