Yahoo Finance Is Altius Minerals (TSE:ALS) A Risky Investment?
The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Altius Minerals Corporation (TSE:ALS) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Altius Minerals
What Is Altius Minerals's Net Debt?
The image below, which you can click on for greater detail, shows that Altius Minerals had debt of CA$112.5m at the end of March 2022, a reduction from CA$128.6m over a year. But on the other hand it also has CA$121.3m in cash, leading to a CA$8.76m net cash position.
How Strong Is Altius Minerals' Balance Sheet?
We can see from the most recent balance sheet that Altius Minerals had liabilities of CA$17.9m falling due within a year, and liabilities of CA$174.9m due beyond that. Offsetting these obligations, it had cash of CA$121.3m as well as receivables valued at CA$16.8m due within 12 months. So its liabilities total CA$54.7m more than the combination of its cash and short-term receivables.
Given Altius Minerals has a market capitalization of CA$944.2m, it's hard to believe these liabilities pose much 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, Altius Minerals boasts net cash, so it's fair to say it does not have a heavy debt load!
On top of that, Altius Minerals grew its EBIT by 60% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Altius Minerals can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Altius Minerals 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 last three years, Altius Minerals actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Summing up
We could understand if investors are concerned about Altius Minerals's liabilities, but we can be reassured by the fact it has has net cash of CA$8.76m. The cherry on top was that in converted 130% of that EBIT to free cash flow, bringing in CA$51m. So is Altius Minerals's debt a risk? It doesn't seem so to us. 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. For instance, we've identified 4 warning signs for Altius Minerals (1 shouldn't be ignored) you should be aware of.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.
