You Might Like Fortuna Silver Mines Inc. (TSE:FVI) But Do You Like Its Debt?

While small-cap stocks, such as Fortuna Silver Mines Inc. (TSE:FVI) with its market cap of CA$694m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company’s balance sheet strength. Nevertheless, this is just a partial view of the stock, and I suggest you dig deeper yourself into FVI here.

Does FVI Produce Much Cash Relative To Its Debt?

FVI has built up its total debt levels in the last twelve months, from US$41m to US$78m – this includes long-term debt. With this rise in debt, FVI currently has US$163m remaining in cash and short-term investments to keep the business going. Additionally, FVI has produced US$83m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 107%, indicating that FVI’s debt is appropriately covered by operating cash.

Does FVI’s liquid assets cover its short-term commitments?

Looking at FVI’s US$61m in current liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.57x. The current ratio is the number you get when you divide current assets by current liabilities. Having said that, a ratio greater than 3x may be considered by some to be quite high, however this is not necessarily a negative for the company.

TSX:FVI Historical Debt, April 2nd 2019
TSX:FVI Historical Debt, April 2nd 2019

Can FVI service its debt comfortably?

With debt at 13% of equity, FVI may be thought of as appropriately levered. This range is considered safe as FVI is not taking on too much debt obligation, which can be restrictive and risky for equity-holders.

Next Steps:

FVI’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure FVI has company-specific issues impacting its capital structure decisions. You should continue to research Fortuna Silver Mines to get a more holistic view of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for FVI’s future growth? Take a look at our free research report of analyst consensus for FVI’s outlook.
  2. Valuation: What is FVI worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether FVI is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.