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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Amani Gold Limited (ASX:ANL) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Amani Gold Carry?
As you can see below, Amani Gold had AU$2.10m of debt, at December 2021, which is about the same as the year before. You can click the chart for greater detail. But it also has AU$9.03m in cash to offset that, meaning it has AU$6.93m net cash.
A Look At Amani Gold's Liabilities
We can see from the most recent balance sheet that Amani Gold had liabilities of AU$3.37m falling due within a year, and liabilities of -AU$300.0k due beyond that. Offsetting these obligations, it had cash of AU$9.03m as well as receivables valued at AU$64.1k due within 12 months. So it actually has AU$6.02m more liquid assets than total liabilities.
This surplus suggests that Amani Gold is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Amani Gold boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Amani Gold will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Given its lack of meaningful operating revenue, investors are probably hoping that Amani Gold finds some valuable resources, before it runs out of money.
So How Risky Is Amani Gold?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that Amani Gold had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through AU$5.6m of cash and made a loss of AU$2.7m. With only AU$6.93m on the balance sheet, it would appear that its going to need to raise capital again soon. 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. 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. To that end, you should learn about the 5 warning signs we've spotted with Amani Gold (including 3 which are potentially serious) .
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.