Does Endeavour Silver (TSE:EDR) Have A Healthy Balance Sheet?

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.' 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. Importantly, Endeavour Silver Corp. (TSE:EDR) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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.

View our latest analysis for Endeavour Silver

How Much Debt Does Endeavour Silver Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Endeavour Silver had US$12.6m of debt, an increase on US$7.79m, over one year. However, its balance sheet shows it holds US$124.5m in cash, so it actually has US$111.9m net cash.

How Strong Is Endeavour Silver's Balance Sheet?

We can see from the most recent balance sheet that Endeavour Silver had liabilities of US$36.7m falling due within a year, and liabilities of US$24.3m due beyond that. Offsetting these obligations, it had cash of US$124.5m as well as receivables valued at US$14.7m due within 12 months. So it can boast US$78.2m more liquid assets than total liabilities.

This short term liquidity is a sign that Endeavour Silver could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Endeavour Silver boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Endeavour Silver grew its EBIT by 106% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Endeavour Silver's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Endeavour Silver 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 last two years, Endeavour Silver saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Endeavour Silver has US$111.9m in net cash and a decent-looking balance sheet. And we liked the look of last year's 106% year-on-year EBIT growth. So we are not troubled with Endeavour Silver's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Endeavour Silver 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.