Endeavour Silver (TSE:EDR) Has A Rock Solid Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Endeavour Silver Corp. (TSE:EDR) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Endeavour Silver

How Much Debt Does Endeavour Silver Carry?

The image below, which you can click on for greater detail, shows that Endeavour Silver had debt of US$7.79m at the end of June 2021, a reduction from US$11.0m over a year. But on the other hand it also has US$135.2m in cash, leading to a US$127.4m net cash position.

How Healthy Is Endeavour Silver's Balance Sheet?

According to the last reported balance sheet, Endeavour Silver had liabilities of US$35.8m due within 12 months, and liabilities of US$10.9m due beyond 12 months. Offsetting this, it had US$135.2m in cash and US$16.2m in receivables that were due within 12 months. So it actually has US$104.7m more liquid assets than total liabilities.

This surplus suggests that Endeavour Silver has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Endeavour Silver 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, Endeavour Silver turned things around in the last 12 months, delivering and EBIT of US$10m. 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 Endeavour Silver 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 year, Endeavour Silver actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Endeavour Silver has net cash of US$127.4m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$17m, being 164% of its EBIT. So is Endeavour Silver'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. To that end, you should learn about the 4 warning signs we've spotted with Endeavour Silver (including 1 which makes us a bit uncomfortable) .

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.

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.

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