Yahoo Finance These 4 Measures Indicate That Aura Minerals (TSE:ORA) Is Using Debt Reasonably Well
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 note that Aura Minerals Inc. (TSE:ORA) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Aura Minerals
What Is Aura Minerals's Debt?
The image below, which you can click on for greater detail, shows that at December 2020 Aura Minerals had debt of US$70.4m, up from US$43.0m in one year. But on the other hand it also has US$127.1m in cash, leading to a US$56.7m net cash position.
How Healthy Is Aura Minerals' Balance Sheet?
We can see from the most recent balance sheet that Aura Minerals had liabilities of US$120.7m falling due within a year, and liabilities of US$102.8m due beyond that. Offsetting these obligations, it had cash of US$127.1m as well as receivables valued at US$35.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$60.6m.
Since publicly traded Aura Minerals shares are worth a total of US$873.0m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Aura Minerals boasts net cash, so it's fair to say it does not have a heavy debt load!
Better yet, Aura Minerals grew its EBIT by 237% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Aura Minerals'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Aura Minerals 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, Aura Minerals reported free cash flow worth 19% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.
Summing up
We could understand if investors are concerned about Aura Minerals's liabilities, but we can be reassured by the fact it has has net cash of US$56.7m. And it impressed us with its EBIT growth of 237% over the last year. So we don't think Aura Minerals's use of debt is risky. 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. For example, we've discovered 3 warning signs for Aura Minerals that you should be aware of before investing here.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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. 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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