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Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say “The biggest risk in investing is not price volatility, but suffering a permanent loss of capital.” . So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Like many other companies Amani Gold Limited (ASX: ANL) uses debt. But does this debt worry shareholders?
When is debt a problem?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still painful) scenario is that he must raise new equity at low cost, thereby diluting shareholders over the long term. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we think of a business’s use of debt, we first look at cash flow and debt together.
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How much debt does Amani Gold have?
The image below, which you can click for more details, shows Amani Gold owed A $ 2.10 million in debt at the end of June 2021, a reduction from $ 3.09 million. Australians over one year. However, he has AU $ 874.6,000 in cash offsetting this, which leads to net debt of around AU $ 1.23 million.
How healthy is Amani Gold’s track record?
According to balance sheet data, Amani Gold had A $ 3.00 million liability due within 12 months, but no longer term liabilities. In return, he had AU $ 874.6,000 in cash and AU $ 62.4,000 in receivables due within 12 months. Its liabilities therefore total AU $ 2.07 million more than the combination of its cash and short-term receivables.
Considering that the listed Amani Gold shares are worth a total of A $ 56.8 million, it seems unlikely that this level of liabilities is a major threat. But there are enough liabilities that we would certainly recommend that shareholders continue to monitor the balance sheet going forward. There is no doubt that we learn the most about debt from the balance sheet. But you can’t look at debt in isolation; because Amani Gold will need income to repay this debt. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.
As Amani Gold does not have significant operating income, shareholders are likely hoping that it will develop a new mine of value before too long.
Emptor Warning
While Amani Gold’s drop in earnings is about as comforting as a wet blanket, its earnings before interest and taxes (EBIT) can be said to be even less attractive. Indeed, it lost AU $ 3.4 million in EBIT. Considering that besides the liabilities mentioned above, we are not convinced that the company should use so much debt. We therefore believe that its record is a bit strained, but not irreparable. However, it doesn’t help that he spent A $ 4.6 million in cash in the past year. In short, it’s a really risky title. The balance sheet is clearly the area you need to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. These risks can be difficult to spot. Every business has them, and we’ve spotted 7 warning signs for Amani Gold (including 4 potentially serious!) that you should know.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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