Pan American Silver (TSE:PAAS) Has A Rock Solid Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Pan American Silver Corp. (TSE:PAAS) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Pan American Silver

What Is Pan American Silver's Net Debt?

As you can see below, Pan American Silver had US$116.3m of debt at September 2020, down from US$335.8m a year prior. However, its balance sheet shows it holds US$231.6m in cash, so it actually has US$115.3m net cash.

How Strong Is Pan American Silver's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Pan American Silver had liabilities of US$286.9m due within 12 months and liabilities of US$568.7m due beyond that. Offsetting these obligations, it had cash of US$231.6m as well as receivables valued at US$142.3m due within 12 months. So its liabilities total US$481.6m more than the combination of its cash and short-term receivables.

Of course, Pan American Silver has a market capitalization of US$7.01b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Pan American Silver boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Pan American Silver grew its EBIT by 412% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Pan American Silver's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Pan American Silver 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, Pan American Silver generated free cash flow amounting to a very robust 83% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Pan American Silver has US$115.3m in net cash. The cherry on top was that in converted 83% of that EBIT to free cash flow, bringing in US$246m. So we don't think Pan American Silver's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Pan American Silver you should be aware of.

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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