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

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. 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?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

View our latest analysis for Endeavour Silver

What Is Endeavour Silver's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Endeavour Silver had US$14.5m of debt, an increase on US$10.5m, over one year. But on the other hand it also has US$92.0m in cash, leading to a US$77.5m net cash position.

How Healthy Is Endeavour Silver's Balance Sheet?

The latest balance sheet data shows that Endeavour Silver had liabilities of US$52.7m due within a year, and liabilities of US$30.8m falling due after that. Offsetting these obligations, it had cash of US$92.0m as well as receivables valued at US$18.2m due within 12 months. So it actually has US$26.7m 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. Simply put, the fact that Endeavour Silver has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Endeavour Silver grew its EBIT by 218% over twelve months. That boost will make it even easier to pay down debt going forward. 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'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. 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 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

While we empathize with investors who find debt concerning, you should keep in mind that Endeavour Silver has net cash of US$77.5m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 218% over the last year. So we are not troubled with Endeavour Silver's debt use. 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. Be aware that Endeavour Silver is showing 3 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

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.