Would First Majestic Silver (TSE:FR) Be Better Off With Less Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies First Majestic Silver Corp. (TSE:FR) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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?

The chart below, which you can click on for greater detail, shows that First Majestic Silver had US$217.2m in debt in September 2023; about the same as the year before. On the flip side, it has US$193.4m in cash leading to net debt of about US$23.8m.

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$100.5m due within 12 months and liabilities of US$512.3m due beyond that. On the other hand, it had cash of US$193.4m and US$34.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$384.7m.

While this might seem like a lot, it is not so bad since First Majestic Silver has a market capitalization of US$1.37b, 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. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Over 12 months, First Majestic Silver made a loss at the EBIT level, and saw its revenue drop to US$585m, which is a fall of 14%. We would much prefer see growth.

Caveat Emptor

Not only did First Majestic Silver's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable US$165m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled US$155m in negative free cash flow over the last twelve months. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - First Majestic Silver has 2 warning signs we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.