First Majestic Silver (TSE:AG) Is Making Moderate Use Of Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 First Majestic Silver Corp. (TSE:AG) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for First Majestic Silver

What Is First Majestic Silver's Net Debt?

The image below, which you can click on for greater detail, shows that First Majestic Silver had debt of US$206.8m at the end of September 2024, a reduction from US$217.2m over a year. However, because it has a cash reserve of US$154.7m, its net debt is less, at about US$52.1m.

How Strong Is First Majestic Silver's Balance Sheet?

According to the last reported balance sheet, First Majestic Silver had liabilities of US$117.4m due within 12 months, and liabilities of US$482.8m due beyond 12 months. Offsetting this, it had US$154.7m in cash and US$59.1m in receivables that were due within 12 months. So its liabilities total US$386.3m more than the combination of its cash and short-term receivables.

Of course, First Majestic Silver has a market capitalization of US$1.96b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if First Majestic Silver 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.

In the last year First Majestic Silver had a loss before interest and tax, and actually shrunk its revenue by 10%, to US$525m. We would much prefer see growth.

Caveat Emptor

Not only did First Majestic Silver's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at US$104m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$26m of cash over the last year. So to be blunt we think it is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for First Majestic Silver that you should be aware of.

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.