Here's Why Argo Blockchain (LON:ARB) Can Afford Some 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 Argo Blockchain plc (LON:ARB) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. 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.

View our latest analysis for Argo Blockchain

How Much Debt Does Argo Blockchain Carry?

You can click the graphic below for the historical numbers, but it shows that Argo Blockchain had US$51.8m of debt in March 2024, down from US$75.2m, one year before. However, because it has a cash reserve of US$12.4m, its net debt is less, at about US$39.4m.

A Look At Argo Blockchain's Liabilities

We can see from the most recent balance sheet that Argo Blockchain had liabilities of US$23.8m falling due within a year, and liabilities of US$39.1m due beyond that. Offsetting these obligations, it had cash of US$12.4m as well as receivables valued at US$2.21m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$48.3m.

This deficit is considerable relative to its market capitalization of US$62.2m, so it does suggest shareholders should keep an eye on Argo Blockchain's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Over 12 months, Argo Blockchain reported revenue of US$56m, which is a gain of 12%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Argo Blockchain had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable US$17m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of US$29m into a profit. In the meantime, we consider the stock very 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. To that end, you should be aware of the 4 warning signs we've spotted with Argo Blockchain .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.

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