Maverix Metals (TSE:MMX) Seems To Use Debt Rather Sparingly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Maverix Metals Inc. (TSE:MMX) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Maverix Metals

How Much Debt Does Maverix Metals Carry?

You can click the graphic below for the historical numbers, but it shows that Maverix Metals had US$23.5m of debt in September 2021, down from US$35.0m, one year before. However, its balance sheet shows it holds US$44.6m in cash, so it actually has US$21.1m net cash.

A Look At Maverix Metals' Liabilities

We can see from the most recent balance sheet that Maverix Metals had liabilities of US$3.99m falling due within a year, and liabilities of US$27.0m due beyond that. Offsetting these obligations, it had cash of US$44.6m as well as receivables valued at US$6.97m due within 12 months. So it actually has US$20.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Maverix Metals could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Maverix Metals has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Maverix Metals grew its EBIT by 524% over twelve months. That boost will make it even easier to pay down debt going forward. 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're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Over the last three years, Maverix Metals actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to investigate a company's debt, in this case Maverix Metals has US$21.1m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$55m, being 120% of its EBIT. So is Maverix Metals's debt a risk? It doesn't seem so to us. 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. We've identified 3 warning signs with Maverix Metals (at least 1 which is significant) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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