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. As with many other companies Maya Gold and Silver Inc. (TSE:MYA) 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 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 step when considering a company’s debt levels is to consider its cash and debt together.
How Much Debt Does Maya Gold and Silver Carry?
You can click the graphic below for the historical numbers, but it shows that Maya Gold and Silver had US$58.2k of debt in June 2019, down from US$176.7k, one year before. However, it does have US$17.2m in cash offsetting this, leading to net cash of US$17.2m.
How Healthy Is Maya Gold and Silver’s Balance Sheet?
The latest balance sheet data shows that Maya Gold and Silver had liabilities of US$4.76m due within a year, and liabilities of US$1.14m falling due after that. Offsetting this, it had US$17.2m in cash and US$971.0k in receivables that were due within 12 months. So it can boast US$12.3m more liquid assets than total liabilities.
This surplus suggests that Maya Gold and Silver has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Maya Gold and Silver has more cash than debt is arguably a good indication that it can manage its debt safely.
It was also good to see that despite losing money on the EBIT line last year, Maya Gold and Silver turned things around in the last 12 months, delivering and EBIT of US$642k. There’s no doubt that we learn most about debt from the balance sheet. But it is Maya Gold and Silver’s earnings that will influence how the balance sheet holds up in the future. So when considering debt, it’s definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Maya Gold and Silver 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 year, Maya Gold and Silver saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.
While it is always sensible to investigate a company’s debt, in this case Maya Gold and Silver has US$17.2m in net cash and a decent-looking balance sheet. So we don’t have any problem with Maya Gold and Silver’s use of debt. Of course, we wouldn’t say no to the extra confidence that we’d gain if we knew that Maya Gold and Silver insiders have been buying shares: if you’re on the same wavelength, you can find out if insiders are buying by clicking this link.
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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