Here's Why A-Mark Precious Metals (NASDAQ:AMRK) Is Weighed Down By Its Debt Load

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, A-Mark Precious Metals, Inc. (NASDAQ:AMRK) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for A-Mark Precious Metals

What Is A-Mark Precious Metals's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 A-Mark Precious Metals had US$928.9m of debt, an increase on US$776.5m, over one year. However, it does have US$46.9m in cash offsetting this, leading to net debt of about US$882.0m.

How Strong Is A-Mark Precious Metals' Balance Sheet?

The latest balance sheet data shows that A-Mark Precious Metals had liabilities of US$989.6m due within a year, and liabilities of US$374.7m falling due after that. Offsetting these obligations, it had cash of US$46.9m as well as receivables valued at US$157.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$1.16b.

This deficit casts a shadow over the US$603.9m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, A-Mark Precious Metals would probably need a major re-capitalization if its creditors were to demand repayment.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

A-Mark Precious Metals has a rather high debt to EBITDA ratio of 11.7 which suggests a meaningful debt load. However, its interest coverage of 5.4 is reasonably strong, which is a good sign. Importantly, A-Mark Precious Metals's EBIT fell a jaw-dropping 62% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. 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 A-Mark Precious Metals can strengthen its balance sheet over time. 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. So it's worth checking how much of that EBIT is backed by free cash flow. During the last three years, A-Mark Precious Metals burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

To be frank both A-Mark Precious Metals's EBIT growth rate and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. Having said that, its ability to cover its interest expense with its EBIT isn't such a worry. We think the chances that A-Mark Precious Metals has too much debt a very significant. To us, that makes the stock rather risky, like walking through a dog park with your eyes closed. But some investors may feel differently. 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. We've identified 4 warning signs with A-Mark Precious Metals (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

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.