Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, American Resources Corporation (NASDAQ:AREC) does carry debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for American Resources
What Is American Resources's Net Debt?
You can click the graphic below for the historical numbers, but it shows that American Resources had US$22.2m of debt in September 2021, down from US$34.1m, one year before. However, it does have US$19.1m in cash offsetting this, leading to net debt of about US$3.06m.
How Healthy Is American Resources' Balance Sheet?
According to the last reported balance sheet, American Resources had liabilities of US$27.9m due within 12 months, and liabilities of US$21.2m due beyond 12 months. On the other hand, it had cash of US$19.1m and US$2.11m worth of receivables due within a year. So it has liabilities totalling US$27.9m more than its cash and near-term receivables, combined.
American Resources has a market capitalization of US$138.9m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine American Resources's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year American Resources had a loss before interest and tax, and actually shrunk its revenue by 56%, to US$3.2m. To be frank that doesn't bode well.
Caveat Emptor
Not only did American Resources's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping US$27m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$32m of cash over the last year. So suffice it to say we consider the stock very risky. 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. For example, we've discovered 5 warning signs for American Resources (3 are concerning!) that you should be aware of before investing here.
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.
About NasdaqCM:AREC
American Resources
American Resources Corporation, together with its subsidiaries, extracts, processes, transports, and sells metallurgical coal to the steel and industrial industries.
High growth potential slight.