Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Endeavour Silver Corp. (TSE:EDR) does use debt in its business. 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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Endeavour Silver's Debt?
As you can see below, at the end of June 2019, Endeavour Silver had US$2.82m of debt, up from none a year ago. Click the image for more detail. However, it does have US$23.2m in cash offsetting this, leading to net cash of US$20.3m.
How Strong Is Endeavour Silver's Balance Sheet?
According to the last reported balance sheet, Endeavour Silver had liabilities of US$20.5m due within 12 months, and liabilities of US$11.9m due beyond 12 months. Offsetting this, it had US$23.2m in cash and US$26.7m in receivables that were due within 12 months. So it actually has US$17.5m 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. Simply put, the fact that Endeavour Silver has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Endeavour Silver 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, Endeavour Silver saw its revenue drop to US$130m, which is a fall of 19%. 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 we do note that Endeavour Silver had negative earnings before interest and tax (EBIT), over the last year. And over the same period it saw negative free cash outflow of US$22m and booked a US$33m accounting loss. Given it only has net cash of US$23m, the company may need to raise more capital if it doesn't reach break-even 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. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Endeavour Silver insider transactions.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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