Is Great Panther Mining (TSE:GPR) Using Debt In A Risky Way?

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.' 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. We can see that Great Panther Mining Limited (TSE:GPR) does use debt in its business. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Great Panther Mining

How Much Debt Does Great Panther Mining Carry?

As you can see below, at the end of December 2021, Great Panther Mining had US$48.9m of debt, up from US$33.4m a year ago. Click the image for more detail. On the flip side, it has US$47.7m in cash leading to net debt of about US$1.25m.

How Strong Is Great Panther Mining's Balance Sheet?

According to the last reported balance sheet, Great Panther Mining had liabilities of US$91.8m due within 12 months, and liabilities of US$84.3m due beyond 12 months. Offsetting this, it had US$47.7m in cash and US$14.4m in receivables that were due within 12 months. So its liabilities total US$113.9m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of US$96.9m, we think shareholders really should watch Great Panther Mining's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. Great Panther Mining has a very little net debt but plenty of other liabilities weighing it down. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Great Panther Mining 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.

In the last year Great Panther Mining had a loss before interest and tax, and actually shrunk its revenue by 29%, to US$186m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Great Panther Mining'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$36m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of US$45m over the last twelve months. That means it's on the risky side of things. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Great Panther Mining that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.