Share Dilution

Is Aris Gold (TSE: ARIS) a risky investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Mostly, Aris Gold Company (TSE: ARIS) is in debt. But does this debt concern shareholders?

When Is Debt a Problem?

Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. If things really go wrong, lenders can take over the business. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. By replacing dilution, however, debt can be a very good tool for companies 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 flow and debt together.

Check out our latest analysis for Aris Gold

What is Aris Gold’s debt?

As you can see below, at the end of March 2021, Aris Gold was in debt of $ 80.7 million, down from zero a year ago. Click on the image for more details. But it also has $ 143.4 million in cash to make up for that, which means it has $ 62.7 million in net cash.

TSX: ARIS Debt to Equity History June 12, 2021

How strong is Aris Gold’s balance sheet?

According to the latest published balance sheet, Aris Gold had liabilities of US $ 17.0 million due within 12 months and liabilities of US $ 128.7 million due beyond 12 months. On the other hand, he had US $ 143.4 million in cash and US $ 2.72 million in receivables due within one year. Thus, its total liabilities correspond more or less perfectly to its short-term liquid assets.

Considering the size of Aris Gold, it appears that its liquid assets are well balanced with its total liabilities. So the $ 258.5 million company is highly unlikely to run out of cash, but it’s still worth keeping an eye on the balance sheet. In short, Aris Gold has clear cash flow, so it’s fair to say that it doesn’t have a lot of debt! The balance sheet is clearly the area you need to focus on when analyzing debt. But it is future earnings, more than anything, that will determine Aris Gold’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future you can check this out free report showing analysts‘ earnings forecasts.

In the past year, Aris Gold was not profitable on EBIT level, but managed to increase its revenue by 18%, to $ 46 million. We generally like to see unprofitable businesses growing faster, but each in their own way.

So how risky is Aris Gold?

Statistically speaking, businesses that lose money are riskier than those that earn it. And the point is that over the past twelve months, Aris Gold has lost money in earnings before interest and taxes (EBIT). And during the same period, it recorded negative free cash outflows of US $ 31 million and a book loss of US $ 74 million. With only $ 62.7 million on the balance sheet, it looks like it will soon have to raise capital again. Even if its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company does not produce regular free cash flow. 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 off the balance sheet. We have identified 1 warning sign with Aris Gold, and understanding them should be part of your investment process.

Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash-flow-growing stocks today.

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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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