Is Jaguar Mining (TSE:JAG) A Risky Investment?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Jaguar Mining Inc. (TSE:JAG) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Jaguar Mining

What Is Jaguar Mining's Debt?

As you can see below, Jaguar Mining had US$3.04m of debt, at March 2023, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$25.8m in cash, leading to a US$22.8m net cash position.

How Strong Is Jaguar Mining's Balance Sheet?

We can see from the most recent balance sheet that Jaguar Mining had liabilities of US$32.2m falling due within a year, and liabilities of US$36.9m due beyond that. On the other hand, it had cash of US$25.8m and US$7.65m worth of receivables due within a year. So its liabilities total US$35.6m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Jaguar Mining has a market capitalization of US$123.5m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Jaguar Mining boasts net cash, so it's fair to say it does not have a heavy debt load!

While Jaguar Mining doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 three years, Jaguar Mining recorded free cash flow of 37% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While Jaguar Mining does have more liabilities than liquid assets, it also has net cash of US$22.8m. So we don't have any problem with Jaguar Mining's use of debt. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Jaguar Mining insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

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.