These 4 Measures Indicate That Endeavour Mining (TSE:EDV) Is Using Debt Safely

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.' 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 Mining plc (TSE:EDV) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Endeavour Mining

What Is Endeavour Mining's Net Debt?

The image below, which you can click on for greater detail, shows that Endeavour Mining had debt of US$916.8m at the end of March 2022, a reduction from US$1.04b over a year. However, it does have US$1.05b in cash offsetting this, leading to net cash of US$129.8m.

How Healthy Is Endeavour Mining's Balance Sheet?

The latest balance sheet data shows that Endeavour Mining had liabilities of US$1.08b due within a year, and liabilities of US$1.46b falling due after that. On the other hand, it had cash of US$1.05b and US$109.0m worth of receivables due within a year. So its liabilities total US$1.38b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Endeavour Mining is worth US$4.74b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Endeavour Mining boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Endeavour Mining grew its EBIT by 25% in the last year, and that should make it 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 Mining 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. While Endeavour Mining 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. Over the last three 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$129.8m. The cherry on top was that in converted 139% of that EBIT to free cash flow, bringing in US$778m. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Endeavour Mining , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.