We Think Endeavour Mining (TSE:EDV) Can Stay On Top Of Its Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 more important question is: how much risk is that debt creating?

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. 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. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Endeavour Mining

What Is Endeavour Mining's Debt?

The chart below, which you can click on for greater detail, shows that Endeavour Mining had US$824.7m in debt in December 2022; about the same as the year before. However, its balance sheet shows it holds US$951.1m in cash, so it actually has US$126.4m net cash.

A Look At Endeavour Mining's Liabilities

The latest balance sheet data shows that Endeavour Mining had liabilities of US$1.05b due within a year, and liabilities of US$1.28b falling due after that. On the other hand, it had cash of US$951.1m and US$93.2m worth of receivables due within a year. So it has liabilities totalling US$1.28b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Endeavour Mining has a market capitalization of US$5.97b, 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!

Shareholders should be aware that Endeavour Mining's EBIT was down 52% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. When analysing debt levels, the balance sheet is the obvious place to start. 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Happily for any shareholders, Endeavour Mining actually produced more free cash flow than EBIT over the last three years. 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$126.4m. The cherry on top was that in converted 150% of that EBIT to free cash flow, bringing in US$504m. So we are not troubled with Endeavour Mining's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Endeavour Mining .

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.