Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies First Majestic Silver Corp. (TSE:FR) makes use of debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 step when considering a company's debt levels is to consider its cash and debt together.
What Is First Majestic Silver's Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2021 First Majestic Silver had US$155.8m of debt, an increase on US$149.1m, over one year. But on the other hand it also has US$264.9m in cash, leading to a US$109.2m net cash position.
How Strong Is First Majestic Silver's Balance Sheet?
The latest balance sheet data shows that First Majestic Silver had liabilities of US$133.0m due within a year, and liabilities of US$499.7m falling due after that. Offsetting this, it had US$264.9m in cash and US$85.4m in receivables that were due within 12 months. So it has liabilities totalling US$282.3m more than its cash and near-term receivables, combined.
Since publicly traded First Majestic Silver shares are worth a total of US$2.91b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, First Majestic Silver boasts net cash, so it's fair to say it does not have a heavy debt load!
Although First Majestic Silver made a loss at the EBIT level, last year, it was also good to see that it generated US$99m in EBIT over the last twelve months. 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 First Majestic Silver'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While First Majestic 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. Over the last year, First Majestic Silver saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.
We could understand if investors are concerned about First Majestic Silver's liabilities, but we can be reassured by the fact it has has net cash of US$109.2m. So we are not troubled with First Majestic Silver's debt use. 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. To that end, you should be aware of the 2 warning signs we've spotted with First Majestic Silver .
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.
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.
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