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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Anglo Asian Mining PLC (LON:AAZ) does carry debt. But should shareholders be worried about its use of debt?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.
What Is Anglo Asian Mining's Net Debt?
The image below, which you can click on for greater detail, shows that Anglo Asian Mining had debt of US$5.25m at the end of June 2019, a reduction from US$15.4m over a year. But on the other hand it also has US$20.5m in cash, leading to a US$15.2m net cash position.
A Look At Anglo Asian Mining's Liabilities
We can see from the most recent balance sheet that Anglo Asian Mining had liabilities of US$29.1m falling due within a year, and liabilities of US$31.7m due beyond that. Offsetting these obligations, it had cash of US$20.5m as well as receivables valued at US$3.60m due within 12 months. So its liabilities total US$36.7m more than the combination of its cash and short-term receivables.
Of course, Anglo Asian Mining has a market capitalization of US$195.9m, 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. Despite its noteworthy liabilities, Anglo Asian Mining boasts net cash, so it's fair to say it does not have a heavy debt load!
On top of that, Anglo Asian Mining grew its EBIT by 63% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Anglo Asian Mining 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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Anglo Asian Mining 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, Anglo Asian Mining actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
Although Anglo Asian Mining'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$15.2m. And it impressed us with free cash flow of US$22m, being 127% of its EBIT. So we don't think Anglo Asian Mining's use of debt is risky. We'd be very excited to see if Anglo Asian Mining insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.
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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