Amerigo Resources (TSE:ARG) could easily take on more debt

Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The greatest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Like many other companies Amerigo Resources Ltd. (TSE:ARG) uses debt. But does this debt worry shareholders?

Why is debt risky?

Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. If things go really bad, lenders can take over the business. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. By replacing dilution, however, debt can be a great tool for companies 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.

See our latest analysis for Amerigo Resources

How much debt does Amerigo Resources have?

The image below, which you can click on for more details, shows Amerigo Resources had $30.8 million in debt at the end of March 2022, down from $48.9 million year-over-year . However, he has $71.5 million in cash to offset that, which translates to a net cash of $40.7 million.

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A look at the liabilities of Amerigo Resources

Zooming in on the latest balance sheet data, we can see that Amerigo Resources had liabilities of US$63.5 million due within 12 months and liabilities of US$71.5 million due beyond. In compensation for these obligations, it had cash of US$71.5 million as well as receivables valued at US$13.7 million and maturing within 12 months. Thus, its liabilities total $49.8 million more than the combination of its cash and short-term receivables.

Amerigo Resources has a market capitalization of $184.1 million, so it could very likely raise funds to improve its balance sheet, should the need arise. However, it is always worth taking a close look at your ability to repay debt. While it has liabilities to note, Amerigo Resources also has more cash than debt, so we’re fairly confident it can manage its debt safely.

What is even more impressive is that Amerigo Resources increased its EBIT by 107% year-over-year. If sustained, this growth will make debt even more manageable in years to come. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Amerigo Resources can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. Amerigo Resources may have net cash on the balance sheet, but it’s always interesting to see how well the company converts its earnings before interest and tax (EBIT) into free cash flow, as this will influence both its need and its ability. . to manage debt. Fortunately for all shareholders, Amerigo Resources has actually produced more free cash flow than EBIT over the past two years. This kind of high cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summary

Although Amerigo Resources’ balance sheet is not particularly strong, due to total liabilities, it is clearly positive to see that it has a net cash position of $40.7 million. And it impressed us with free cash flow of $73 million, or 116% of its EBIT. We therefore do not believe that Amerigo Resources’ use of debt is risky. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist outside of the balance sheet. Be aware that Amerigo Resources displays 4 warning signs in our investment analysis and 1 of them concerns…

In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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