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.' So it seems the smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess how risky a company is. Importantly, Endeavour Silver Corp. (TSE:EDR) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Endeavour Silver
What Is Endeavour Silver's Net Debt?
The image below, which you can click on for greater detail, shows that Endeavour Silver had debt of US$8.70m at the end of March 2021, a reduction from US$11.5m over a year. But on the other hand it also has US$89.7m in cash, leading to a US$81.0m net cash position.
How Healthy Is Endeavour Silver's Balance Sheet?
We can see from the most recent balance sheet that Endeavour Silver had liabilities of US$36.1m falling due within a year, and liabilities of US$11.7m due beyond that. Offsetting this, it had US$89.7m in cash and US$17.0m in receivables that were due within 12 months. So it can boast US$58.9m more liquid assets than total liabilities.
This surplus suggests that Endeavour Silver has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Endeavour Silver boasts net cash, so it's fair to say it does not have a heavy debt load!
Although Endeavour Silver made a loss at the EBIT level, last year, it was also good to see that it generated US$8.7m in EBIT over the last twelve months. 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 Endeavour Silver can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Endeavour Silver may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Endeavour Silver actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
While it is always sensible to investigate a company's debt, in this case Endeavour Silver has US$81.0m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$10m, being 116% of its EBIT. So we don't think Endeavour Silver's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Endeavour Silver is showing 4 warning signs in our investment analysis , you should know about…
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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