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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Alphamin Resources Corp. (CVE:AFM) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Alphamin Resources's Net Debt?
The image below, which you can click on for greater detail, shows that Alphamin Resources had debt of US$34.8m at the end of September 2021, a reduction from US$63.9m over a year. However, it does have US$41.0m in cash offsetting this, leading to net cash of US$6.22m.
A Look At Alphamin Resources' Liabilities
Zooming in on the latest balance sheet data, we can see that Alphamin Resources had liabilities of US$89.7m due within 12 months and liabilities of US$29.5m due beyond that. On the other hand, it had cash of US$41.0m and US$46.2m worth of receivables due within a year. So its liabilities total US$32.1m more than the combination of its cash and short-term receivables.
Of course, Alphamin Resources has a market capitalization of US$947.3m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Alphamin Resources also has more cash than debt, so we're pretty confident it can manage its debt safely.
Even more impressive was the fact that Alphamin Resources grew its EBIT by 478% over twelve months. 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 Alphamin Resources'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. While Alphamin Resources 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. During the last two years, Alphamin Resources produced sturdy free cash flow equating to 58% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.
We could understand if investors are concerned about Alphamin Resources's liabilities, but we can be reassured by the fact it has has net cash of US$6.22m. And we liked the look of last year's 478% year-on-year EBIT growth. So is Alphamin Resources's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Alphamin Resources you should know about.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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.