We Think Avino Silver & Gold Mines (TSE:ASM) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Avino Silver & Gold Mines Ltd. (TSE:ASM) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. 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. 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.

Our analysis indicates that ASM is potentially undervalued!

How Much Debt Does Avino Silver & Gold Mines Carry?

As you can see below, at the end of June 2022, Avino Silver & Gold Mines had US$4.76m of debt, up from US$835.0k a year ago. Click the image for more detail. However, its balance sheet shows it holds US$12.8m in cash, so it actually has US$8.03m net cash.

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

The latest balance sheet data shows that Avino Silver & Gold Mines had liabilities of US$11.3m due within a year, and liabilities of US$6.27m falling due after that. Offsetting these obligations, it had cash of US$12.8m as well as receivables valued at US$5.10m due within 12 months. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that Avino Silver & Gold Mines' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$71.6m company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Avino Silver & Gold Mines boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Avino Silver & Gold Mines turned things around in the last 12 months, delivering and EBIT of US$8.1m. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Avino Silver & Gold Mines 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. In the last year, Avino Silver & Gold Mines's free cash flow amounted to 34% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Avino Silver & Gold Mines has US$8.03m in net cash and a decent-looking balance sheet. So we don't have any problem with Avino Silver & Gold Mines's use of debt. 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. We've identified 2 warning signs with Avino Silver & Gold Mines , and understanding them should be part of your investment process.

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.