Here's Why Jaguar Mining (TSE:JAG) Can Manage Its Debt Responsibly
David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Jaguar Mining Inc. (TSE:JAG) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Jaguar Mining
What Is Jaguar Mining's Debt?
You can click the graphic below for the historical numbers, but it shows that Jaguar Mining had US$5.96m of debt in March 2020, down from US$21.9m, one year before. However, its balance sheet shows it holds US$12.1m in cash, so it actually has US$6.17m net cash.
How Strong Is Jaguar Mining's Balance Sheet?
We can see from the most recent balance sheet that Jaguar Mining had liabilities of US$27.3m falling due within a year, and liabilities of US$30.8m due beyond that. On the other hand, it had cash of US$12.1m and US$12.0m worth of receivables due within a year. So its liabilities total US$34.0m more than the combination of its cash and short-term receivables.
Given Jaguar Mining has a market capitalization of US$323.2m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Jaguar Mining boasts net cash, so it's fair to say it does not have a heavy debt load!
Although Jaguar Mining made a loss at the EBIT level, last year, it was also good to see that it generated US$16m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Jaguar Mining's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Jaguar Mining has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Considering the last year, Jaguar Mining actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.
Summing up
Although Jaguar Mining's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$6.17m. So we don't have any problem with Jaguar Mining's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Jaguar Mining you should be aware of.
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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