These 4 Measures Indicate That Endeavour Silver (TSE:EDR) Is Using Debt Reasonably Well
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. Importantly, Endeavour Silver Corp. (TSE:EDR) does carry debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, 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$6.93m at the end of September 2021, a reduction from US$10.7m over a year. However, its balance sheet shows it holds US$108.1m in cash, so it actually has US$101.2m net cash.
A Look At Endeavour Silver's Liabilities
The latest balance sheet data shows that Endeavour Silver had liabilities of US$32.4m due within a year, and liabilities of US$13.2m falling due after that. Offsetting this, it had US$108.1m in cash and US$17.4m in receivables that were due within 12 months. So it can boast US$79.9m more liquid assets than total liabilities.
This short term liquidity is a sign that Endeavour Silver could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Endeavour Silver boasts net cash, so it's fair to say it does not have a heavy debt load!
It was also good to see that despite losing money on the EBIT line last year, Endeavour Silver turned things around in the last 12 months, delivering and EBIT of US$14m. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Endeavour Silver's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Endeavour Silver has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, Endeavour Silver saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.
Summing up
While we empathize with investors who find debt concerning, you should keep in mind that Endeavour Silver has net cash of US$101.2m, as well as more liquid assets than liabilities. So we are not troubled with Endeavour Silver's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Endeavour Silver (at least 1 which is potentially serious) , and understanding them should be part of your investment process.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
