Is Great Panther Mining (TSE:GPR) A Risky Investment?

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.' 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. As with many other companies Great Panther Mining Limited (TSE:GPR) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Great Panther Mining

What Is Great Panther Mining's Net Debt?

As you can see below, at the end of June 2020, Great Panther Mining had US$48.3m of debt, up from US$42.5m a year ago. Click the image for more detail. But on the other hand it also has US$60.2m in cash, leading to a US$11.9m net cash position.

How Healthy Is Great Panther Mining's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Great Panther Mining had liabilities of US$110.2m due within 12 months and liabilities of US$69.4m due beyond that. Offsetting this, it had US$60.2m in cash and US$15.6m in receivables that were due within 12 months. So it has liabilities totalling US$103.8m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Great Panther Mining is worth US$327.8m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Great Panther Mining boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Great Panther Mining 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, Great Panther Mining reported revenue of US$252m, which is a gain of 186%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!

So How Risky Is Great Panther Mining?

Although Great Panther Mining had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$18m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. One positive is that Great Panther Mining is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But we still think it's somewhat risky. 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. To that end, you should be aware of the 3 warning signs we've spotted with Great Panther Mining .

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.

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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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