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.' 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, Atalaya Mining Plc (LON:ATYM) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Atalaya Mining's Net Debt?
As you can see below, at the end of December 2021, Atalaya Mining had €47.4m of debt, up from none a year ago. Click the image for more detail. But it also has €107.6m in cash to offset that, meaning it has €60.1m net cash.
How Healthy Is Atalaya Mining's Balance Sheet?
According to the last reported balance sheet, Atalaya Mining had liabilities of €80.5m due within 12 months, and liabilities of €69.0m due beyond 12 months. Offsetting this, it had €107.6m in cash and €47.3m in receivables that were due within 12 months. So it actually has €5.36m more liquid assets than total liabilities.
Having regard to Atalaya Mining's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the €567.2m company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Atalaya Mining has more cash than debt is arguably a good indication that it can manage its debt safely.
Even more impressive was the fact that Atalaya Mining grew its EBIT by 353% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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 Atalaya Mining's ability to maintain a healthy balance sheet going forward. 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. While Atalaya Mining 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, Atalaya Mining recorded free cash flow of 50% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.
While we empathize with investors who find debt concerning, you should keep in mind that Atalaya Mining has net cash of €60.1m, as well as more liquid assets than liabilities. And we liked the look of last year's 353% year-on-year EBIT growth. So is Atalaya Mining'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 4 warning signs for Atalaya Mining (of which 1 shouldn't be ignored!) you should know about.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.