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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Pan American Silver Corp. (TSE:PAAS) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Pan American Silver

How Much Debt Does Pan American Silver Carry?

As you can see below, Pan American Silver had US$20.8m of debt at March 2021, down from US$280.8m a year prior. But on the other hand it also has US$206.4m in cash, leading to a US$185.6m net cash position.

How Strong Is Pan American Silver's Balance Sheet?

The latest balance sheet data shows that Pan American Silver had liabilities of US$324.8m due within a year, and liabilities of US$454.5m falling due after that. On the other hand, it had cash of US$206.4m and US$139.1m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$433.8m.

Since publicly traded Pan American Silver shares are worth a total of US$5.90b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Pan American Silver also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Pan American Silver grew its EBIT by 122% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Over the last two years, Pan American Silver recorded free cash flow worth a fulsome 91% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

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$185.6m in net cash. And it impressed us with free cash flow of US$207m, being 91% of its EBIT. So we don't think Pan American Silver's use of debt is risky. We'd be very excited to see if Pan American Silver insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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