We Think Antofagasta (LON:ANTO) Can Manage Its Debt With Ease

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Antofagasta plc (LON:ANTO) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Antofagasta

What Is Antofagasta's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2021 Antofagasta had debt of US$3.33b, up from US$2.47b in one year. But on the other hand it also has US$4.24b in cash, leading to a US$909.9m net cash position.

A Look At Antofagasta's Liabilities

The latest balance sheet data shows that Antofagasta had liabilities of US$1.95b due within a year, and liabilities of US$4.81b falling due after that. Offsetting these obligations, it had cash of US$4.24b as well as receivables valued at US$697.2m due within 12 months. So its liabilities total US$1.82b more than the combination of its cash and short-term receivables.

Given Antofagasta has a humongous market capitalization of US$19.1b, 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. While it does have liabilities worth noting, Antofagasta also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Antofagasta grew its EBIT by 180% 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 Antofagasta'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Antofagasta 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 most recent three years, Antofagasta recorded free cash flow worth 61% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

We could understand if investors are concerned about Antofagasta's liabilities, but we can be reassured by the fact it has has net cash of US$909.9m. And it impressed us with its EBIT growth of 180% over the last year. So is Antofagasta's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Antofagasta is showing 1 warning sign in our investment analysis , you should know about...

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.

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.

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