We Think Pan American Silver (TSE:PAAS) Can Manage Its Debt With Ease

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Pan American Silver Corp. (TSE:PAAS) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Pan American Silver

What Is Pan American Silver's Debt?

As you can see below, Pan American Silver had US$36.9m of debt at September 2021, down from US$116.3m a year prior. But it also has US$315.4m in cash to offset that, meaning it has US$278.5m net cash.

How Strong Is Pan American Silver's Balance Sheet?

According to the last reported balance sheet, Pan American Silver had liabilities of US$365.2m due within 12 months, and liabilities of US$475.0m due beyond 12 months. Offsetting this, it had US$315.4m in cash and US$145.3m in receivables that were due within 12 months. So it has liabilities totalling US$379.5m more than its cash and near-term receivables, combined.

Of course, Pan American Silver has a market capitalization of US$5.83b, 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!

On top of that, Pan American Silver grew its EBIT by 84% over the last twelve months, and that growth will make it easier to handle its debt. 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, a company can only pay off debt with cold hard cash, not accounting profits. 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 produced sturdy free cash flow equating to 78% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

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$278.5m in net cash. And it impressed us with its EBIT growth of 84% over the last year. So is Pan American Silver's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Pan American Silver, you may well want to click here to check an interactive graph of its earnings per share history.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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