Is Endeavour Silver (TSE:EDR) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Endeavour Silver

What Is Endeavour Silver's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Endeavour Silver had US$10.7m of debt, an increase on US$7.64m, over one year. However, its balance sheet shows it holds US$45.2m in cash, so it actually has US$34.5m net cash.

How Strong Is Endeavour Silver's Balance Sheet?

The latest balance sheet data shows that Endeavour Silver had liabilities of US$28.1m due within a year, and liabilities of US$17.3m falling due after that. Offsetting these obligations, it had cash of US$45.2m as well as receivables valued at US$17.3m due within 12 months. So it actually has US$17.0m 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! The balance sheet is clearly the area to focus on when you are analysing debt. 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.

In the last year Endeavour Silver's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

So How Risky Is Endeavour Silver?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Endeavour Silver had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$8.4m and booked a US$37m accounting loss. With only US$34.5m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Endeavour Silver you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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