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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Atalaya Mining Plc (LON:ATYM) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. If things get really bad, the lenders can take control of the business. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Atalaya Mining
What Is Atalaya Mining's Net Debt?
The image below, which you can click on for greater detail, shows that at June 2020 Atalaya Mining had debt of €14.9m, up from none in one year. However, its balance sheet shows it holds €32.4m in cash, so it actually has €17.5m net cash.
How Strong Is Atalaya Mining's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Atalaya Mining had liabilities of €83.5m due within 12 months and liabilities of €65.4m due beyond that. On the other hand, it had cash of €32.4m and €44.9m worth of receivables due within a year. So its liabilities total €71.6m more than the combination of its cash and short-term receivables.
While this might seem like a lot, it is not so bad since Atalaya Mining has a market capitalization of €282.0m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Atalaya Mining boasts net cash, so it's fair to say it does not have a heavy debt load!
On the other hand, Atalaya Mining's EBIT dived 20%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Atalaya Mining's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.