Is Silver Elephant Mining (TSE:ELEF) Using Debt Sensibly?

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.' 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. We note that Silver Elephant Mining Corp. (TSE:ELEF) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Silver Elephant Mining

What Is Silver Elephant Mining's Debt?

The image below, which you can click on for greater detail, shows that at June 2022 Silver Elephant Mining had debt of CA$3.74m, up from none in one year. However, its balance sheet shows it holds CA$3.83m in cash, so it actually has CA$87.4k net cash.

How Healthy Is Silver Elephant Mining's Balance Sheet?

We can see from the most recent balance sheet that Silver Elephant Mining had liabilities of CA$4.15m falling due within a year, and liabilities of CA$5.67m due beyond that. Offsetting this, it had CA$3.83m in cash and CA$119.3k in receivables that were due within 12 months. So its liabilities total CA$5.87m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Silver Elephant Mining is worth CA$15.6m, 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. While it does have liabilities worth noting, Silver Elephant Mining also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Silver Elephant Mining's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Since Silver Elephant Mining doesn't have significant operating revenue, shareholders must hope it'll sell some fossil fuels, before it runs out of money.

So How Risky Is Silver Elephant Mining?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Silver Elephant Mining had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CA$5.7m of cash and made a loss of CA$8.4m. With only CA$87.4k on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. For example Silver Elephant Mining has 4 warning signs (and 1 which is potentially serious) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.