Is Maverix Metals (TSE:MMX) Using Too Much Debt?

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. As with many other companies Maverix Metals Inc. (TSE:MMX) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Maverix Metals

What Is Maverix Metals's Debt?

As you can see below, Maverix Metals had US$32.0m of debt at December 2020, down from US$69.0m a year prior. On the flip side, it has US$26.0m in cash leading to net debt of about US$6.00m.

How Strong Is Maverix Metals' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Maverix Metals had liabilities of US$6.62m due within 12 months and liabilities of US$32.0m due beyond that. Offsetting these obligations, it had cash of US$26.0m as well as receivables valued at US$13.5m due within 12 months. So it actually has US$913.0k more liquid assets than total liabilities.

Having regard to Maverix Metals' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$831.3m company is short on cash, but still worth keeping an eye on the balance sheet. But either way, Maverix Metals has virtually no net debt, so it's fair to say it does not have a heavy debt load!

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

With net debt sitting at just 0.16 times EBITDA, Maverix Metals is arguably pretty conservatively geared. And this view is supported by the solid interest coverage, with EBIT coming in at 8.3 times the interest expense over the last year. It was also good to see that despite losing money on the EBIT line last year, Maverix Metals turned things around in the last 12 months, delivering and EBIT of US$20m. 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 Maverix Metals 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. Over the last year, Maverix Metals actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our View

The good news is that Maverix Metals's demonstrated ability to convert EBIT to free cash flow delights us like a fluffy puppy does a toddler. And that's just the beginning of the good news since its net debt to EBITDA is also very heartening. Looking at the bigger picture, we think Maverix Metals's use of debt seems quite reasonable and we're not concerned about it. While debt does bring risk, when used wisely it can also bring a higher return on equity. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Maverix Metals that you should be aware of before investing here.

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.

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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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