We Think Endeavour Silver (TSE:EDR) Can Stay On Top Of Its Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. 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 A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, 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 March 2022 Endeavour Silver had US$12.3m of debt, an increase on US$8.70m, over one year. But on the other hand it also has US$164.9m in cash, leading to a US$152.6m net cash position.

How Healthy Is Endeavour Silver's Balance Sheet?

We can see from the most recent balance sheet that Endeavour Silver had liabilities of US$40.7m falling due within a year, and liabilities of US$22.6m due beyond that. On the other hand, it had cash of US$164.9m and US$13.6m worth of receivables due within a year. So it can boast US$115.2m more liquid assets than total liabilities.

This surplus suggests that Endeavour Silver is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Endeavour Silver boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Endeavour Silver grew its EBIT by 158% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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 two years, Endeavour Silver recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing up

While it is always sensible to investigate a company's debt, in this case Endeavour Silver has US$152.6m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 158% over the last year. So is Endeavour Silver's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 5 warning signs for Endeavour Silver you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.