Does Endeavour Mining (TSE:EDV) Have A Healthy Balance Sheet?

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.' 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. We can see that Endeavour Mining plc (TSE:EDV) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Endeavour Mining

What Is Endeavour Mining's Net Debt?

As you can see below, at the end of December 2021, Endeavour Mining had US$841.9m of debt, up from US$688.3m a year ago. Click the image for more detail. But it also has US$906.2m in cash to offset that, meaning it has US$64.3m net cash.

How Healthy Is Endeavour Mining's Balance Sheet?

According to the last reported balance sheet, Endeavour Mining had liabilities of US$567.1m due within 12 months, and liabilities of US$1.82b due beyond 12 months. Offsetting this, it had US$906.2m in cash and US$96.1m in receivables that were due within 12 months. So its liabilities total US$1.38b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Endeavour Mining has a market capitalization of US$6.50b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Endeavour Mining boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Endeavour Mining has boosted its EBIT by 33%, thus reducing the spectre of future debt repayments. 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 Mining's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Endeavour Mining 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 Mining actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While Endeavour Mining does have more liabilities than liquid assets, it also has net cash of US$64.3m. The cherry on top was that in converted 129% of that EBIT to free cash flow, bringing in US$644m. So is Endeavour Mining's debt a risk? It doesn't seem so to us. 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 Mining is showing 2 warning signs in our investment analysis , you should know about...

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.