Does Argo Blockchain (LON:ARB) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. Importantly, Argo Blockchain plc (LON:ARB) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Argo Blockchain

What Is Argo Blockchain's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Argo Blockchain had UK£37.9m of debt, an increase on UK£286.8k, over one year. But it also has UK£63.7m in cash to offset that, meaning it has UK£25.8m net cash.

How Healthy Is Argo Blockchain's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Argo Blockchain had liabilities of UK£65.1m due within 12 months and liabilities of UK£6.31m due beyond that. Offsetting these obligations, it had cash of UK£63.7m as well as receivables valued at UK£1.96m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£5.77m.

This state of affairs indicates that Argo Blockchain's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the UK£328.1m company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Argo Blockchain boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Argo Blockchain made a loss at the EBIT level, last year, it was also good to see that it generated UK£33m in EBIT over the last twelve months. 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 Argo Blockchain 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Argo Blockchain 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 last year, Argo Blockchain saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Argo Blockchain has UK£25.8m in net cash. So we don't have any problem with Argo Blockchain's use of debt. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Argo Blockchain (of which 1 is potentially serious!) you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.