Here's Why Endeavour Silver (TSE:EDR) Can Manage Its Debt Responsibly

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 Endeavour Silver Corp. (TSE:EDR) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, 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 thing to do when considering how much debt a business uses is to look at its cash and debt 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 Endeavour Silver had US$6.93m of debt in September 2021, down from US$10.7m, one year before. But it also has US$108.1m in cash to offset that, meaning it has US$101.2m net cash.

A Look At Endeavour Silver's Liabilities

Zooming in on the latest balance sheet data, we can see that Endeavour Silver had liabilities of US$32.4m due within 12 months and liabilities of US$13.2m due beyond that. Offsetting this, it had US$108.1m in cash and US$17.4m in receivables that were due within 12 months. So it actually has US$79.9m 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. Simply put, the fact that Endeavour Silver has more cash than debt is arguably a good indication that it can manage its debt safely.

Although Endeavour Silver made a loss at the EBIT level, last year, it was also good to see that it generated US$14m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept 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. During the last year, Endeavour Silver burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Endeavour Silver has net cash of US$101.2m, as well as more liquid assets than liabilities. So we don't have any problem with Endeavour Silver's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 4 warning signs we've spotted with Endeavour Silver (including 2 which don't sit too well with us) .

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.