Does First Majestic Silver (TSE:FR) Have A Healthy Balance Sheet?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that First Majestic Silver Corp. (TSE:FR) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for First Majestic Silver

What Is First Majestic Silver's Debt?

As you can see below, at the end of December 2021, First Majestic Silver had US$181.2m of debt, up from US$152.7m a year ago. Click the image for more detail. But it also has US$264.4m in cash to offset that, meaning it has US$83.2m net cash.

How Strong Is First Majestic Silver's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that First Majestic Silver had liabilities of US$172.8m due within 12 months and liabilities of US$541.2m due beyond that. On the other hand, it had cash of US$264.4m and US$54.3m worth of receivables due within a year. So its liabilities total US$395.3m more than the combination of its cash and short-term receivables.

Of course, First Majestic Silver has a market capitalization of US$2.48b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, First Majestic Silver boasts net cash, so it's fair to say it does not have a heavy debt load!

The bad news is that First Majestic Silver saw its EBIT decline by 15% over the last year. If that sort of decline is not arrested, then the managing its debt will be harder than selling broccoli flavoured ice-cream for a premium. 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 First Majestic Silver can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. First Majestic 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 three years, 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.

Summing up

Although First Majestic Silver's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$83.2m. Despite the cash, we do find First Majestic Silver's conversion of EBIT to free cash flow concerning, so we're not particularly comfortable with the stock. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for First Majestic Silver you should know about.

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.