Is Anglo American Platinum (JSE:AMS) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that Anglo American Platinum Limited (JSE:AMS) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Anglo American Platinum

What Is Anglo American Platinum's Net Debt?

The image below, which you can click on for greater detail, shows that Anglo American Platinum had debt of R82.0m at the end of December 2022, a reduction from R131.0m over a year. But on the other hand it also has R29.6b in cash, leading to a R29.5b net cash position.

How Strong Is Anglo American Platinum's Balance Sheet?

According to the last reported balance sheet, Anglo American Platinum had liabilities of R58.1b due within 12 months, and liabilities of R21.9b due beyond 12 months. Offsetting this, it had R29.6b in cash and R5.95b in receivables that were due within 12 months. So it has liabilities totalling R44.4b more than its cash and near-term receivables, combined.

Given Anglo American Platinum has a humongous market capitalization of R293.3b, 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.

In fact Anglo American Platinum's saving grace is its low debt levels, because its EBIT has tanked 33% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. 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 59% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

Although Anglo American Platinum's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of R29.5b. So we are not troubled with Anglo American Platinum's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Anglo American Platinum is showing 4 warning signs in our investment analysis , and 2 of those make us uncomfortable...

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.

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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.