Warren Buffett famously said, ‘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. Importantly, Alphamin Resources Corp. (CVE:AFM) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 step when considering a company’s debt levels is to consider its cash and debt together.

View our latest analysis for Alphamin Resources

How Much Debt Does Alphamin Resources Carry?

You can click the graphic below for the historical numbers, but it shows that Alphamin Resources had US$5.96m of debt in March 2022, down from US$54.8m, one year before. However, it does have US$140.6m in cash offsetting this, leading to net cash of US$134.7m.

debt-equity-history-analysisHow Healthy Is Alphamin Resources’ Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Alphamin Resources had liabilities of US$101.2m due within 12 months and liabilities of US$30.7m due beyond that. On the other hand, it had cash of US$140.6m and US$46.5m worth of receivables due within a year. So it actually has US$55.3m more liquid assets than total liabilities.

This surplus suggests that Alphamin Resources has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Alphamin Resources has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Alphamin Resources grew its EBIT by 324% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. 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 company can only pay off debt with cold hard cash, not accounting profits. Alphamin Resources 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. During the last two years, Alphamin Resources produced sturdy free cash flow equating to 76% of its EBIT, about what we’d expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Alphamin Resources has net cash of US$134.7m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 324% over the last year. So is Alphamin Resources’s debt a risk? It doesn’t seem so to us. There’s no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example – Alphamin Resources has 3 warning signs we think you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.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.