Here's Why Andean Precious Metals (TSE:APM) Can Manage Its Debt Responsibly

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Andean Precious Metals Corp. (TSE:APM) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Andean Precious Metals's Debt?

The image below, which you can click on for greater detail, shows that at December 2024 Andean Precious Metals had debt of US$70.3m, up from US$47.5m in one year. However, its balance sheet shows it holds US$101.0m in cash, so it actually has US$30.7m net cash.

A Look At Andean Precious Metals' Liabilities

Zooming in on the latest balance sheet data, we can see that Andean Precious Metals had liabilities of US$89.7m due within 12 months and liabilities of US$74.4m due beyond that. On the other hand, it had cash of US$101.0m and US$4.89m worth of receivables due within a year. So its liabilities total US$58.2m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Andean Precious Metals has a market capitalization of US$203.4m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Andean Precious Metals also has more cash than debt, so we're pretty confident it can manage its debt safely.

See our latest analysis for Andean Precious Metals

It was also good to see that despite losing money on the EBIT line last year, Andean Precious Metals turned things around in the last 12 months, delivering and EBIT of US$40m. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Andean Precious Metals's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Andean Precious Metals has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, Andean Precious Metals recorded free cash flow worth a fulsome 86% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While Andean Precious Metals does have more liabilities than liquid assets, it also has net cash of US$30.7m. And it impressed us with free cash flow of US$35m, being 86% of its EBIT. So is Andean Precious Metals's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Andean Precious Metals that you should be aware of.

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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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.