David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Atalaya Mining Plc (LON:ATYM) does have debt on its balance sheet. But is this debt a concern to shareholders?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Atalaya Mining
The image below, which you can click on for greater detail, shows that Atalaya Mining had debt of €27.7m at the end of June 2024, a reduction from €43.9m over a year. But it also has €81.1m in cash to offset that, meaning it has €53.4m net cash.
We can see from the most recent balance sheet that Atalaya Mining had liabilities of €98.1m falling due within a year, and liabilities of €45.9m due beyond that. Offsetting this, it had €81.1m in cash and €36.9m in receivables that were due within 12 months. So it has liabilities totalling €26.1m more than its cash and near-term receivables, combined.
Given Atalaya Mining has a market capitalization of €621.0m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Atalaya Mining also has more cash than debt, so we're pretty confident it can manage its debt safely.
In addition to that, we're happy to report that Atalaya Mining has boosted its EBIT by 60%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Atalaya Mining can strengthen its balance sheet over time. 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. Atalaya Mining 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. Looking at the most recent three years, Atalaya Mining recorded free cash flow of 31% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.
We could understand if investors are concerned about Atalaya Mining's liabilities, but we can be reassured by the fact it has has net cash of €53.4m. And we liked the look of last year's 60% year-on-year EBIT growth. So we don't think Atalaya Mining's use of debt is risky. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Atalaya Mining insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.