Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Hecla Mining Company (NYSE:HL) does carry debt. But should shareholders be worried about its use of debt?
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, 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Hecla Mining's Debt?
The chart below, which you can click on for greater detail, shows that Hecla Mining had US$548.9m in debt in March 2019; about the same as the year before. However, it does have US$11.8m in cash offsetting this, leading to net debt of about US$537.1m.
How Healthy Is Hecla Mining's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Hecla Mining had liabilities of US$146.8m due within 12 months and liabilities of US$877.2m due beyond that. On the other hand, it had cash of US$11.8m and US$31.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$980.7m.
Given this deficit is actually higher than the company's market capitalization of US$928.7m, we think shareholders really should watch Hecla Mining's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Hecla Mining 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, Hecla Mining saw its revenue hold pretty steady. While that's not too bad, we'd prefer see growth.
Over the last twelve months Hecla Mining produced an earnings before interest and tax (EBIT) loss. Indeed, it lost US$7.4m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through US$55m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Hecla Mining's profit, revenue, and operating cashflow have changed over the last few years.
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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