Atalaya Mining (LON:ATYM) could easily take on more debt
Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Like many other companies Atalaya Mining Plc (LON:ATYM) uses debt. But should shareholders worry about its use of debt?
What risk does debt carry?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. If things go really bad, lenders can take over the business. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. When we look at debt levels, we first consider cash and debt levels, together.
See our latest analysis for Atalaya Mining
What is Atalaya Mining’s debt?
You can click on the chart below for historical figures, but it shows Atalaya Mining had €41.6 million in debt in March 2022, up from €53.0 million a year prior. However, he has €128.5m in cash which offsets this, leading to a net cash of €86.9m.
How strong is Atalaya Mining’s balance sheet?
According to the last published balance sheet, Atalaya Mining had liabilities of 87.6 million euros maturing within 12 months and liabilities of 69.0 million euros maturing beyond 12 months. In return for these obligations, it had cash of €128.5 million as well as receivables worth €37.1 million at less than 12 months. It can therefore claim 9.06 million euros more in cash than total Passives.
Considering the size of Atalaya Mining, it appears its cash is well balanced with its total liabilities. So while it’s hard to imagine the €546.4m company struggling for cash, we still think it’s worth keeping an eye on its balance sheet. In short, Atalaya Mining has clean cash, so it’s fair to say that they don’t have a lot of debt!
Even more impressively, Atalaya Mining increased its EBIT by 102% year-over-year. If sustained, this growth will make debt even more manageable in years to come. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Atalaya Mining 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.
Finally, a company can only repay its debts with cold hard cash, not with book profits. Although Atalaya Mining has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it’s building (or erodes) that treasury. balance. Over the past three years, Atalaya Mining has recorded free cash flow of 61% of its EBIT, which is about normal, given that free cash flow excludes interest and taxes. This cold hard cash allows him to reduce his debt whenever he wants.
If it’s always a good idea to investigate a company’s debt, in this case Atalaya Mining has 86.9 million euros in net cash and a decent balance sheet. And we liked the look of EBIT growth of 102% YoY last year. We therefore do not believe that Atalaya Mining’s use of debt is risky. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example – Atalaya Mining has 1 warning sign we think you should know.
In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
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.