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, Antofagasta plc (LON:ANTO) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Antofagasta's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2020 Antofagasta had US$3.55b of debt, an increase on US$2.51b, over one year. But it also has US$3.67b in cash to offset that, meaning it has US$126.2m net cash.
How Strong Is Antofagasta's Balance Sheet?
We can see from the most recent balance sheet that Antofagasta had liabilities of US$1.63b falling due within a year, and liabilities of US$4.90b due beyond that. On the other hand, it had cash of US$3.67b and US$1.07b worth of receivables due within a year. So its liabilities total US$1.78b more than the combination of its cash and short-term receivables.
Given Antofagasta has a humongous market capitalization of US$25.9b, 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.
And we also note warmly that Antofagasta grew its EBIT by 17% last year, making its debt load easier to handle. 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. During the last three years, Antofagasta produced sturdy free cash flow equating to 52% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.
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$126.2m. And we liked the look of last year's 17% year-on-year EBIT growth. 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…
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.
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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