Does Maverix Metals (TSE:MMX) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Maverix Metals Inc. (TSE:MMX) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Maverix Metals

How Much Debt Does Maverix Metals Carry?

The image below, which you can click on for greater detail, shows that Maverix Metals had debt of US$34.9m at the end of September 2020, a reduction from US$51.0m over a year. However, it does have US$42.3m in cash offsetting this, leading to net cash of US$7.48m.

How Healthy Is Maverix Metals' Balance Sheet?

We can see from the most recent balance sheet that Maverix Metals had liabilities of US$12.9m falling due within a year, and liabilities of US$35.0m due beyond that. Offsetting this, it had US$42.3m in cash and US$11.7m in receivables that were due within 12 months. So it can boast US$6.19m more liquid assets than total liabilities.

This state of affairs indicates that Maverix Metals' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$767.4m company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Maverix Metals has more cash than debt is arguably a good indication that it can manage its debt safely.

Shareholders should be aware that Maverix Metals's EBIT was down 42% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Maverix Metals can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Maverix Metals 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. During the last three years, Maverix Metals burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case Maverix Metals has US$7.48m in net cash and a decent-looking balance sheet. Despite its cash we think that Maverix Metals seems to struggle to grow its EBIT, so we are wary of the stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Maverix Metals is showing 2 warning signs in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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. 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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