Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about… and every practical investor I know worries about.' So it seems the smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess how risky a company is. As with many other companies Aurcana Silver Corporation (CVE:AUN) makes use of debt. But is this debt a concern to shareholders?
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. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.
What Is Aurcana Silver's Net Debt?
As you can see below, at the end of March 2021, Aurcana Silver had US$20.7m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has US$39.1m in cash, leading to a US$18.5m net cash position.
How Strong Is Aurcana Silver's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Aurcana Silver had liabilities of US$1.54m due within 12 months and liabilities of US$29.0m due beyond that. Offsetting this, it had US$39.1m in cash and US$46.4k in receivables that were due within 12 months. So it actually has US$8.66m more liquid assets than total liabilities.
This surplus suggests that Aurcana Silver has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Aurcana Silver boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Aurcana Silver's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Given its lack of meaningful operating revenue, investors are probably hoping that Aurcana Silver finds some valuable resources, before it runs out of money.
So How Risky Is Aurcana Silver?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Aurcana Silver lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$36m of cash and made a loss of US$15m. Given it only has net cash of US$18.5m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet – far from it. We've identified 2 warning signs with Aurcana Silver (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.
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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