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 can see that Aurelia Metals Limited (ASX:AMI) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Aurelia Metals

What Is Aurelia Metals's Debt?

As you can see below, Aurelia Metals had AU$26.0m of debt at June 2022, down from AU$34.4m a year prior. However, it does have AU$76.7m in cash offsetting this, leading to net cash of AU$50.7m.

A Look At Aurelia Metals' Liabilities

According to the last reported balance sheet, Aurelia Metals had liabilities of AU$116.2m due within 12 months, and liabilities of AU$109.1m due beyond 12 months. On the other hand, it had cash of AU$76.7m and AU$27.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$120.9m.

Aurelia Metals has a market capitalization of AU$334.1m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Aurelia Metals also has more cash than debt, so we're pretty confident it can manage its debt safely.

Importantly, Aurelia Metals's EBIT fell a jaw-dropping 97% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Aurelia Metals 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.