The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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, Coeur Mining, Inc. (NYSE:CDE) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
What Is Coeur Mining's Debt?
The image below, which you can click on for greater detail, shows that Coeur Mining had debt of US$299.2m at the end of June 2019, a reduction from US$419.7m over a year. However, it does have US$37.9m in cash offsetting this, leading to net debt of about US$261.3m.
A Look At Coeur Mining's Liabilities
The latest balance sheet data shows that Coeur Mining had liabilities of US$210.2m due within a year, and liabilities of US$620.6m falling due after that. On the other hand, it had cash of US$37.9m and US$38.5m worth of receivables due within a year. So its liabilities total US$754.4m more than the combination of its cash and short-term receivables.
This is a mountain of leverage relative to its market capitalization of US$1.17b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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 Coeur Mining 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.
In the last year Coeur Mining had negative earnings before interest and tax, and actually shrunk its revenue by 14%, to US$610m. That's not what we would hope to see.
Not only did Coeur Mining's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at US$112m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$89m of cash over the last year. So in short it's a really risky stock. For riskier companies like Coeur Mining I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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