Here's Why Jaguar Mining (TSE:JAG) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Jaguar Mining Inc. (TSE:JAG) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Jaguar Mining

What Is Jaguar Mining's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Jaguar Mining had US$3.04m of debt in June 2021, down from US$4.28m, one year before. However, it does have US$34.4m in cash offsetting this, leading to net cash of US$31.4m.

A Look At Jaguar Mining's Liabilities

We can see from the most recent balance sheet that Jaguar Mining had liabilities of US$28.7m falling due within a year, and liabilities of US$29.8m due beyond that. Offsetting this, it had US$34.4m in cash and US$4.90m in receivables that were due within 12 months. So its liabilities total US$19.3m more than the combination of its cash and short-term receivables.

Of course, Jaguar Mining has a market capitalization of US$229.2m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Jaguar Mining boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Jaguar Mining has boosted its EBIT by 81%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Jaguar 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Jaguar 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. Looking at the most recent two years, Jaguar Mining recorded free cash flow of 39% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

We could understand if investors are concerned about Jaguar Mining's liabilities, but we can be reassured by the fact it has has net cash of US$31.4m. And we liked the look of last year's 81% year-on-year EBIT growth. So we don't think Jaguar Mining's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Jaguar Mining that you should be aware of.

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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