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Is Adriatic Metals (ASX:ADT) Using Debt In A Risky Way?

Warren Buffett famously said, '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. As with many other companies Adriatic Metals PLC (ASX:ADT) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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.

View our latest analysis for Adriatic Metals

What Is Adriatic Metals's Net Debt?

The chart below, which you can click on for greater detail, shows that Adriatic Metals had US$16.1m in debt in June 2022; about the same as the year before. However, its balance sheet shows it holds US$83.4m in cash, so it actually has US$67.4m net cash.


How Healthy Is Adriatic Metals' Balance Sheet?

The latest balance sheet data shows that Adriatic Metals had liabilities of US$3.56m due within a year, and liabilities of US$20.3m falling due after that. Offsetting these obligations, it had cash of US$83.4m as well as receivables valued at US$7.09m due within 12 months. So it actually has US$66.6m more liquid assets than total liabilities.

This surplus suggests that Adriatic Metals is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Adriatic Metals has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Adriatic Metals's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Since Adriatic Metals has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.

So How Risky Is Adriatic Metals?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Adriatic Metals had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$33m of cash and made a loss of US$17m. However, it has net cash of US$67.4m, so it has a bit of time before it will need more capital. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Adriatic Metals (1 doesn't sit too well with us!) that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at)

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.

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