Yahoo Finance These 4 Measures Indicate That Aurelia Metals (ASX:AMI) Is Using Debt Safely
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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Aurelia Metals Limited (ASX:AMI) does carry debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Aurelia Metals
What Is Aurelia Metals's Net Debt?
As you can see below, Aurelia Metals had AU$132.0k of debt at December 2018, down from AU$84.2m a year prior. But it also has AU$108.0m in cash to offset that, meaning it has AU$107.9m net cash.
A Look At Aurelia Metals's Liabilities
According to the last reported balance sheet, Aurelia Metals had liabilities of AU$59.2m due within 12 months, and liabilities of AU$35.5m due beyond 12 months. Offsetting these obligations, it had cash of AU$108.0m as well as receivables valued at AU$9.98m due within 12 months. So it can boast AU$23.2m more liquid assets than total liabilities.
This short term liquidity is a sign that Aurelia Metals could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Aurelia Metals boasts net cash, so it's fair to say it does not have a heavy debt load!
Better yet, Aurelia Metals grew its EBIT by 208% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Aurelia Metals'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Aurelia Metals may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Aurelia Metals actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
Summing up
While we empathize with investors who find debt concerning, you should keep in mind that Aurelia Metals has net cash of AU$108m, as well as more liquid assets than liabilities. The cherry on top was that in converted 106% of that EBIT to free cash flow, bringing in AU$135m. So we don't think Aurelia Metals's use of debt is risky. Another factor that would give us confidence in Aurelia Metals would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.
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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
