Is Investing in Alara Resources (ASX:AUQ) Risky?

April 06, 2025 06:30 PM AEST | By Team Kalkine Media

Is Investing in Alara Resources (ASX:AUQ) Risky? — Image source: Shutterstock

Understanding Debt and Risk

Debt becomes problematic for companies when obligations surpass their capacity to settle these responsibilities through free cash flow or capital raises. Creative destruction in capitalism can lead to business failure if debt is poorly managed. Companies often resort to raising equity at unfavorable terms, which impacts shareholders. The advantage of debt is its potential as inexpensive capital, notably when utilized by companies that can achieve high returns on reinvested funds. Evaluating a company’s cash alongside its debt is fundamental in understanding its financial strategy.

Alara Resources' Financial Overview

As of December 2024, Alara Resources reported a debt of AU$103.4 million, increasing from AU$80.2 million the previous year. With AU$9.81 million in cash, the net debt stands at around AU$93.6 million.

The recent balance sheet reveals liabilities of AU$91.4 million due within a year and AU$81.4 million beyond that, offset by AU$9.81 million in cash and AU$5.12 million in receivables. This results in liabilities exceeding cash and near-term receivables by AU$157.9 million. Such a discrepancy highlights the potential need for a significant recapitalization to meet creditor demands.

Performance and Potential Risks

Alara Resources has recently started generating revenue, though not yet profitable, posing a challenge for debt servicing. The company's earnings before interest and tax (EBIT) suffered a substantial loss of AU$11 million last year. Coupled with balance sheet liabilities, this raises flags on its financial strategies. With significant cash burn in the past year, assessing the risk associated with this stock is prudent. Investors should pay close attention to the balance sheet but also recognize other non-balance sheet risks. Alara Resources highlights four warning signs, two of which demand immediate attention.

Focusing on companies without debt-related concerns may simplify investment decisions. Exploring companies with strong growth potential and no net debt could prove beneficial.

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