Endeavour Silver (TSE:EDR) Seems To Use Debt Quite Sensibly

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.' 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. Importantly, Endeavour Silver Corp. (TSE:EDR) does carry debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See 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 Endeavour Silver had US$9.84m of debt in September 2023, down from US$14.0m, one year before. However, its balance sheet shows it holds US$47.1m in cash, so it actually has US$37.3m 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$55.5m falling due within a year, and liabilities of US$33.0m due beyond that. On the other hand, it had cash of US$47.1m and US$19.2m worth of receivables due within a year. So its liabilities total US$22.2m more than the combination of its cash and short-term receivables.

Given Endeavour Silver has a market capitalization of US$387.9m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Endeavour Silver boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Endeavour Silver grew its EBIT by 46% over the last twelve months, and that growth will make it easier to handle its debt. 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. While Endeavour Silver 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. Over the last three 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

We could understand if investors are concerned about Endeavour Silver's liabilities, but we can be reassured by the fact it has has net cash of US$37.3m. And we liked the look of last year's 46% 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. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Endeavour Silver (of which 1 is concerning!) you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.