Would Fortuna Silver Mines (TSE:FVI) Be Better Off With Less Debt?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Fortuna Silver Mines Inc. (TSE:FVI) does use debt in its business. But should shareholders be worried about its use of debt?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Fortuna Silver Mines

How Much Debt Does Fortuna Silver Mines Carry?

The image below, which you can click on for greater detail, shows that at December 2022 Fortuna Silver Mines had debt of US$219.2m, up from US$157.5m in one year. However, it does have US$80.6m in cash offsetting this, leading to net debt of about US$138.6m.

How Strong Is Fortuna Silver Mines' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Fortuna Silver Mines had liabilities of US$135.1m due within 12 months and liabilities of US$452.4m due beyond that. Offsetting these obligations, it had cash of US$80.6m as well as receivables valued at US$61.4m due within 12 months. So its liabilities total US$445.5m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Fortuna Silver Mines has a market capitalization of US$1.03b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 14%, to US$681m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Fortuna Silver Mines had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable US$107m 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$59m of cash over the last year. So in short it's a really risky stock. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Fortuna Silver Mines insider transactions.

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.