Yahoo Finance We Think Aurelia Metals (ASX:AMI) Can Stay On Top Of Its 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.' 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 Aurelia Metals Limited (ASX:AMI) does use debt in its business. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for Aurelia Metals
What Is Aurelia Metals's Debt?
You can click the graphic below for the historical numbers, but it shows that Aurelia Metals had AU$26.8m of debt in December 2021, down from AU$41.8m, one year before. However, its balance sheet shows it holds AU$95.2m in cash, so it actually has AU$68.4m net cash.
How Healthy Is Aurelia Metals' Balance Sheet?
We can see from the most recent balance sheet that Aurelia Metals had liabilities of AU$83.9m falling due within a year, and liabilities of AU$156.5m due beyond that. On the other hand, it had cash of AU$95.2m and AU$16.0m worth of receivables due within a year. So its liabilities total AU$129.1m more than the combination of its cash and short-term receivables.
Aurelia Metals has a market capitalization of AU$556.7m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Aurelia Metals boasts net cash, so it's fair to say it does not have a heavy debt load!
The modesty of its debt load may become crucial for Aurelia Metals if management cannot prevent a repeat of the 39% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Aurelia Metals 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. Over the most recent three years, Aurelia Metals recorded free cash flow worth 69% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Summing up
While Aurelia Metals does have more liabilities than liquid assets, it also has net cash of AU$68.4m. And it impressed us with free cash flow of AU$48m, being 69% of its EBIT. So we are not troubled with Aurelia Metals'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. We've identified 1 warning sign with Aurelia Metals , and understanding them should be part of your investment process.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.
