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.' 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 note that Avino Silver & Gold Mines Ltd. (TSE:ASM) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Avino Silver & Gold Mines's Debt?
The image below, which you can click on for greater detail, shows that Avino Silver & Gold Mines had debt of US$4.38m at the end of June 2020, a reduction from US$7.39m over a year. However, it does have US$10.4m in cash offsetting this, leading to net cash of US$6.01m.
How Strong Is Avino Silver & Gold Mines's Balance Sheet?
We can see from the most recent balance sheet that Avino Silver & Gold Mines had liabilities of US$7.19m falling due within a year, and liabilities of US$7.86m due beyond that. On the other hand, it had cash of US$10.4m and US$6.69m worth of receivables due within a year. So it actually has US$2.03m more liquid assets than total liabilities.
This surplus suggests that Avino Silver & Gold Mines has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Avino Silver & Gold Mines boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Avino Silver & Gold Mines 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.
Over 12 months, Avino Silver & Gold Mines made a loss at the EBIT level, and saw its revenue drop to US$29m, which is a fall of 6.7%. That's not what we would hope to see.
So How Risky Is Avino Silver & Gold Mines?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Avino Silver & Gold Mines had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$3.1m and booked a US$3.0m accounting loss. With only US$6.01m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 4 warning signs we've spotted with Avino Silver & Gold Mines (including 1 which is is a bit concerning) .
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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