Yahoo Finance Aura Minerals (TSE:ORA) Has A Pretty Healthy Balance Sheet
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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Aura Minerals Inc. (TSE:ORA) does have debt on its balance sheet. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Aura Minerals
How Much Debt Does Aura Minerals Carry?
You can click the graphic below for the historical numbers, but it shows that as of September 2021 Aura Minerals had US$157.5m of debt, an increase on US$67.8m, over one year. However, it does have US$165.8m in cash offsetting this, leading to net cash of US$8.29m.
How Healthy Is Aura Minerals' Balance Sheet?
The latest balance sheet data shows that Aura Minerals had liabilities of US$126.6m due within a year, and liabilities of US$181.9m falling due after that. Offsetting these obligations, it had cash of US$165.8m as well as receivables valued at US$42.1m due within 12 months. So it has liabilities totalling US$100.6m more than its cash and near-term receivables, combined.
Of course, Aura Minerals has a market capitalization of US$616.7m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Aura Minerals also has more cash than debt, so we're pretty confident it can manage its debt safely.
In addition to that, we're happy to report that Aura Minerals has boosted its EBIT by 98%, thus reducing the spectre of future debt repayments. 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 Aura Minerals can strengthen its balance sheet over time. 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 Aura 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. Looking at the most recent three years, Aura Minerals recorded free cash flow of 28% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.
Summing up
Although Aura Minerals's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$8.29m. And it impressed us with its EBIT growth of 98% 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. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Aura Minerals you should be aware of.
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.
