We Think First Majestic Silver (TSE:FR) Has A Fair Chunk Of 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.' 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 is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

See our latest analysis for First Majestic Silver

What Is First Majestic Silver's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 First Majestic Silver had US$212.4m of debt, an increase on US$183.6m, over one year. However, it does have US$174.1m in cash offsetting this, leading to net debt of about US$38.3m.

A Look At First Majestic Silver's Liabilities

We can see from the most recent balance sheet that First Majestic Silver had liabilities of US$140.8m falling due within a year, and liabilities of US$512.2m due beyond that. Offsetting these obligations, it had cash of US$174.1m as well as receivables valued at US$41.8m due within 12 months. So it has liabilities totalling US$437.2m more than its cash and near-term receivables, combined.

First Majestic Silver has a market capitalization of US$1.85b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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.

In the last year First Majestic Silver had a loss before interest and tax, and actually shrunk its revenue by 2.5%, to US$624m. We would much prefer see growth.

Caveat Emptor

Over the last twelve months First Majestic Silver produced an earnings before interest and tax (EBIT) loss. Indeed, it lost US$162m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$196m of cash over the last year. So suffice it to say we consider the stock very risky. 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 2 warning signs with First Majestic Silver , and understanding them should be part of your investment process.

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.