Is Avino Silver & Gold Mines (TSE:ASM) Using Too Much Debt?

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 Avino Silver & Gold Mines Ltd. (TSE:ASM) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Avino Silver & Gold Mines

What Is Avino Silver & Gold Mines's Debt?

The image below, which you can click on for greater detail, shows that at September 2022 Avino Silver & Gold Mines had debt of US$4.84m, up from none in one year. But it also has US$10.9m in cash to offset that, meaning it has US$6.08m net cash.

How Strong Is Avino Silver & Gold Mines' Balance Sheet?

We can see from the most recent balance sheet that Avino Silver & Gold Mines had liabilities of US$12.4m falling due within a year, and liabilities of US$6.38m due beyond that. On the other hand, it had cash of US$10.9m and US$5.13m worth of receivables due within a year. So its liabilities total US$2.74m more than the combination of its cash and short-term receivables.

Of course, Avino Silver & Gold Mines has a market capitalization of US$79.5m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Avino Silver & Gold Mines also has more cash than debt, so we're pretty confident it can manage its debt safely.

Although Avino Silver & Gold Mines made a loss at the EBIT level, last year, it was also good to see that it generated US$8.8m in EBIT over the last twelve months. 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 Avino Silver & Gold Mines 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Avino Silver & Gold Mines 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, Avino Silver & Gold Mines recorded free cash flow worth 55% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Avino Silver & Gold Mines has US$6.08m in net cash. So we are not troubled with Avino Silver & Gold Mines's debt use. 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. To that end, you should be aware of the 2 warning signs we've spotted with Avino Silver & Gold Mines .

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.