Is Fortuna Silver Mines (TSE:FVI) Using Too Much 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 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 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Fortuna Silver Mines

How Much Debt Does Fortuna Silver Mines Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Fortuna Silver Mines had US$246.6m of debt, an increase on US$204.2m, over one year. However, it does have US$117.8m in cash offsetting this, leading to net debt of about US$128.8m.

How Healthy Is Fortuna Silver Mines' Balance Sheet?

According to the last reported balance sheet, Fortuna Silver Mines had liabilities of US$155.8m due within 12 months, and liabilities of US$509.8m due beyond 12 months. Offsetting these obligations, it had cash of US$117.8m as well as receivables valued at US$63.0m due within 12 months. So its liabilities total US$484.8m more than the combination of its cash and short-term receivables.

Fortuna Silver Mines has a market capitalization of US$930.3m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. 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 Fortuna Silver Mines can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Fortuna Silver Mines reported revenue of US$742m, which is a gain of 3.7%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Fortuna Silver Mines produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at US$25m. 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. For example, we would not want to see a repeat of last year's loss of US$111m. So we do think this stock is quite risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Fortuna Silver Mines is showing 2 warning signs in our investment analysis , and 1 of those is potentially serious...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.