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. 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 assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
What Is Endeavour Silver's Net Debt?
As you can see below, at the end of June 2020, Endeavour Silver had US$11.0m of debt, up from US$2.82m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$30.7m in cash, so it actually has US$19.7m net cash.
How Strong Is Endeavour Silver's Balance Sheet?
We can see from the most recent balance sheet that Endeavour Silver had liabilities of US$21.1m falling due within a year, and liabilities of US$17.7m due beyond that. Offsetting these obligations, it had cash of US$30.7m as well as receivables valued at US$19.2m due within 12 months. So it can boast US$11.1m 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. Simply put, the fact that Endeavour Silver has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. 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.
Over 12 months, Endeavour Silver made a loss at the EBIT level, and saw its revenue drop to US$108m, which is a fall of 16%. We would much prefer see growth.
So How Risky Is Endeavour Silver?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Endeavour Silver had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$26m of cash and made a loss of US$44m. With only US$19.7m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Endeavour Silver , and understanding them should be part of your investment process.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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