Is Pan American Silver (TSE:PAAS) 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. We can see that Pan American Silver Corp. (TSE:PAAS) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Pan American Silver

What Is Pan American Silver's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 Pan American Silver had US$1.09b of debt, an increase on US$35.2m, over one year. However, it does have US$513.1m in cash offsetting this, leading to net debt of about US$575.0m.

A Look At Pan American Silver's Liabilities

Zooming in on the latest balance sheet data, we can see that Pan American Silver had liabilities of US$634.3m due within 12 months and liabilities of US$2.99b due beyond that. Offsetting these obligations, it had cash of US$513.1m as well as receivables valued at US$217.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$2.89b.

This deficit isn't so bad because Pan American Silver is worth US$5.99b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Pan American Silver 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.

Over 12 months, Pan American Silver made a loss at the EBIT level, and saw its revenue drop to US$1.4b, which is a fall of 15%. That's not what we would hope to see.

Caveat Emptor

Not only did Pan American Silver's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost US$168m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$237m of cash over the last year. So suffice it to say we do consider the stock to be 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. Case in point: We've spotted 2 warning signs for Pan American Silver you should be aware of.

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.

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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.