Anglo American Platinum (JSE:AMS) Could Easily Take On More Debt

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. We can see that Anglo American Platinum Limited (JSE:AMS) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Anglo American Platinum

What Is Anglo American Platinum's Debt?

You can click the graphic below for the historical numbers, but it shows that Anglo American Platinum had R3.99b of debt in June 2021, down from R11.0b, one year before. However, its balance sheet shows it holds R62.5b in cash, so it actually has R58.5b net cash.

How Strong Is Anglo American Platinum's Balance Sheet?

We can see from the most recent balance sheet that Anglo American Platinum had liabilities of R67.0b falling due within a year, and liabilities of R19.5b due beyond that. On the other hand, it had cash of R62.5b and R5.18b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by R18.9b.

Given Anglo American Platinum has a humongous market capitalization of R461.9b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Anglo American Platinum also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Anglo American Platinum grew its EBIT by 214% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Anglo American Platinum'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Anglo American Platinum 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. During the last three years, Anglo American Platinum produced sturdy free cash flow equating to 66% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

We could understand if investors are concerned about Anglo American Platinum's liabilities, but we can be reassured by the fact it has has net cash of R58.5b. And we liked the look of last year's 214% year-on-year EBIT growth. So is Anglo American Platinum's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Anglo American Platinum (1 can't be ignored) you should be aware of.

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.