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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We note that Andean Precious Metals Corp. (TSE:APM) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Andean Precious Metals Carry?

As you can see below, at the end of March 2025, Andean Precious Metals had US$74.0m of debt, up from US$59.9m a year ago. Click the image for more detail. However, it does have US$96.2m in cash offsetting this, leading to net cash of US$22.1m.

How Strong Is Andean Precious Metals' Balance Sheet?

We can see from the most recent balance sheet that Andean Precious Metals had liabilities of US$98.9m falling due within a year, and liabilities of US$56.3m due beyond that. Offsetting these obligations, it had cash of US$96.2m as well as receivables valued at US$4.21m due within 12 months. So its liabilities total US$54.8m more than the combination of its cash and short-term receivables.

Of course, Andean Precious Metals has a market capitalization of US$391.2m, 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. Despite its noteworthy liabilities, Andean Precious Metals boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out 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$61m. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Andean Precious Metals 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Andean Precious Metals 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 most recent year, Andean Precious Metals recorded free cash flow worth 68% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

Although Andean Precious Metals's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$22.1m. And it impressed us with free cash flow of US$41m, being 68% of its EBIT. So we are not troubled with Andean Precious Metals's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Andean Precious Metals you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.