Here's Why Fortuna Silver Mines (TSE:FVI) Can Afford Some Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Fortuna Silver Mines Inc. (TSE:FVI) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Fortuna Silver Mines

What Is Fortuna Silver Mines's Debt?

The image below, which you can click on for greater detail, shows that at June 2023 Fortuna Silver Mines had debt of US$285.9m, up from US$218.6m in one year. However, it also had US$93.4m in cash, and so its net debt is US$192.4m.

How Strong Is Fortuna Silver Mines' Balance Sheet?

The latest balance sheet data shows that Fortuna Silver Mines had liabilities of US$138.7m due within a year, and liabilities of US$547.4m falling due after that. Offsetting this, it had US$93.4m in cash and US$61.2m in receivables that were due within 12 months. So its liabilities total US$531.4m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of US$874.0m, so it does suggest shareholders should keep an eye on Fortuna Silver Mines' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Fortuna Silver Mines'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 Fortuna Silver Mines had a loss before interest and tax, and actually shrunk its revenue by 6.5%, to US$665m. That's not what we would hope to see.

Caveat Emptor

Importantly, Fortuna Silver Mines had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping US$132m. 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. However, it doesn't help that it burned through US$61m of cash over the last year. So suffice it to say we consider the stock very risky. For riskier companies like Fortuna Silver Mines I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.