These 4 Measures Indicate That Endeavour Silver (TSE:EDR) Is Using Debt Safely

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.' 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 is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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, 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.

View our latest analysis for Endeavour Silver

What Is Endeavour Silver's Net Debt?

The image below, which you can click on for greater detail, shows that Endeavour Silver had debt of US$8.70m at the end of March 2021, a reduction from US$11.5m over a year. But it also has US$89.7m in cash to offset that, meaning it has US$81.0m net cash.

How Strong Is Endeavour Silver's Balance Sheet?

According to the last reported balance sheet, Endeavour Silver had liabilities of US$36.1m due within 12 months, and liabilities of US$11.7m due beyond 12 months. Offsetting these obligations, it had cash of US$89.7m as well as receivables valued at US$17.0m due within 12 months. So it actually has US$58.9m more liquid assets than total liabilities.

This short term liquidity is a sign that Endeavour Silver could probably pay off its debt with ease, as its balance sheet is far from stretched. 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$8.7m in EBIT over the last twelve months. 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Happily for any shareholders, Endeavour Silver actually produced more free cash flow than EBIT over the last year. 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 it is always sensible to investigate a company's debt, in this case Endeavour Silver has US$81.0m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 116% of that EBIT to free cash flow, bringing in US$10m. So is Endeavour Silver's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for Endeavour Silver that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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