Is SilverCrest Metals (TSE:SIL) Using Debt Sensibly?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 can see that SilverCrest Metals Inc. (TSE:SIL) 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 assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for SilverCrest Metals

What Is SilverCrest Metals's Debt?

The image below, which you can click on for greater detail, shows that at June 2022 SilverCrest Metals had debt of US$87.5m, up from US$29.1m in one year. However, its balance sheet shows it holds US$118.6m in cash, so it actually has US$31.0m net cash.

How Healthy Is SilverCrest Metals' Balance Sheet?

According to the last reported balance sheet, SilverCrest Metals had liabilities of US$10.8m due within 12 months, and liabilities of US$90.4m due beyond 12 months. On the other hand, it had cash of US$118.6m and US$18.2m worth of receivables due within a year. So it actually has US$35.6m more liquid assets than total liabilities.

This short term liquidity is a sign that SilverCrest Metals could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that SilverCrest Metals has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine SilverCrest Metals'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.

Since SilverCrest Metals has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.

So How Risky Is SilverCrest Metals?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year SilverCrest Metals had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$133m and booked a US$173k accounting loss. But at least it has US$31.0m on the balance sheet to spend on growth, near-term. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for SilverCrest Metals (1 can't be ignored) you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.