We Think Great Panther Mining (TSE:GPR) Is Taking Some Risk With Its Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 note that Great Panther Mining Limited (TSE:GPR) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at 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, Great Panther Mining had US$26.3m of debt at June 2021, down from US$48.3m a year prior. However, it does have US$35.2m in cash offsetting this, leading to net cash of US$8.91m.

A Look At Great Panther Mining's Liabilities

We can see from the most recent balance sheet that Great Panther Mining had liabilities of US$85.8m falling due within a year, and liabilities of US$74.4m due beyond that. On the other hand, it had cash of US$35.2m and US$17.6m worth of receivables due within a year. So it has liabilities totalling US$107.4m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of US$159.0m, so it does suggest shareholders should keep an eye on Great Panther Mining's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Great Panther Mining boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Great Panther Mining turned things around in the last 12 months, delivering and EBIT of US$35m. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Great Panther Mining'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Great Panther Mining may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last year, Great Panther Mining created free cash flow amounting to 4.0% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing up

Although Great Panther Mining's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$8.91m. So although we see some areas for improvement, we're not too worried about Great Panther Mining's balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with Great Panther Mining (including 1 which is concerning) .

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.

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.

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