Should we be concerned about Asiamet Resources's (LON:ARS) balance sheet?

Investing in small and micro-cap miners is a risky game, but the potential upside is huge. Asiamet Resources Limited (LON:ARS), formerly Kalimantan Gold Corporation Limited, is a Canada-based exploration-stage company that firmly fits this high risk/high reward profile. 

With the firm yet to make any revenue, and after reporting an increase in net loss from $2M to $6M for the six months ended 30 June 2018, it's clear that Asiamet's balance sheet strength and cash reserves are key to seeing it through to profitability.

The Altman Z-Score measures the degree to which a stock resembles companies that have gone bankrupt in the past. This could be a useful metric for gauging whether or not Asiamet might be heading for trouble.

What the Altman Z-score says about Asiamet Resources (LON:ARS)

The Altman Z-Score was developed by New York University finance professor and leading academic, Edward I. Altman. A combination of five weighted business ratios, it continues to be used by investment managers and hedge funds to this day.

Any Z-Score above 2.99 is considered to be a safe company, but those with a Z-Score of less than 1.8 have been shown to have a significant risk of financial distress within two years. If we apply it to Asiamet Resources (LON:ARS) what do we get? A Z-Score of -73.4 - well below the cut-off point that signals potential distress...

Here is where the group struggles against the checklist:

Using the Z-Score to protect your portfolio

The Z-Score has proven very effective in predicting business distress but it is no guarantee. It merely describes how closely a company resembles others that have struggled in the past.

That said, I note Asiamet has posted five years of losses and this is set to continue:

The group is forecast to make a loss of nearly $7m in FY2018, yet it only $4m of cash on its balance sheet on its most recent reporting date - and that's after recently raising $10m of equity. If the company is forced into another equity placing, which seems likely, existing shareholders could get diluted.

Anthony Bolton, the well-regarded investment fund manager, once said: "When I analysed the stocks that have lost me the most money, about two-thirds of the time it was due to weak balance sheets. You have to have your eyes open to the fact that if you are buying a company with a weak balance sheet and something changes, then that’s when you are going to be most exposed as a shareholder."

This appears to be a risk at Asiamet.

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