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. So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies SSR Mining Inc. (TSE:SSRM) makes use of debt. But should shareholders be worried about its use of debt?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does SSR Mining Carry?
The image below, which you can click on for greater detail, shows that at December 2019 SSR Mining had debt of US$284.0m, up from US$247.6m in one year. However, its balance sheet shows it holds US$570.1m in cash, so it actually has US$286.1m net cash.
How Healthy Is SSR Mining's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that SSR Mining had liabilities of US$234.2m due within 12 months and liabilities of US$382.0m due beyond that. Offsetting this, it had US$570.1m in cash and US$71.8m in receivables that were due within 12 months. So it actually has US$25.8m more liquid assets than total liabilities.
This state of affairs indicates that SSR Mining's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$2.24b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that SSR Mining has more cash than debt is arguably a good indication that it can manage its debt safely.
Even more impressive was the fact that SSR Mining grew its EBIT by 381% over twelve months. That boost will make it even easier to pay down debt going forward. 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 SSR 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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. SSR Mining may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, SSR Mining recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.
While we empathize with investors who find debt concerning, you should keep in mind that SSR Mining has net cash of US$286.1m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 381% over the last year. So we don't have any problem with SSR Mining's use of debt. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that SSR Mining insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned.
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