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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. As with many other companies AfriTin Mining Limited (LON:ATM) makes use of debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 AfriTin Mining's Debt?
You can click the graphic below for the historical numbers, but it shows that as of August 2020 AfriTin Mining had UK£2.52m of debt, an increase on UK£85.5k, over one year. However, it does have UK£2.58m in cash offsetting this, leading to net cash of UK£61.1k.
How Healthy Is AfriTin Mining's Balance Sheet?
According to the last reported balance sheet, AfriTin Mining had liabilities of UK£3.45m due within 12 months, and liabilities of UK£221.5k due beyond 12 months. On the other hand, it had cash of UK£2.58m and UK£362.8k worth of receivables due within a year. So it has liabilities totalling UK£734.6k more than its cash and near-term receivables, combined.
Since publicly traded AfriTin Mining shares are worth a total of UK£17.9m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, AfriTin Mining boasts net cash, so it's fair to say it does not have a heavy debt load! 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 AfriTin Mining'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.
In the last year AfriTin Mining wasn't profitable at an EBIT level, but managed to grow its revenue by 9,909%, to UK£1.2m. When it comes to revenue growth, that's like nailing the game winning 3-pointer!
So How Risky Is AfriTin Mining?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that AfriTin Mining had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through UK£6.6m of cash and made a loss of UK£2.2m. With only UK£61.1k on the balance sheet, it would appear that its going to need to raise capital again soon. The good news for shareholders is that AfriTin Mining has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. 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. To that end, you should learn about the 5 warning signs we've spotted with AfriTin Mining (including 2 which is can't be ignored) .
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.
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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