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 SSR Mining Inc. (TSE:SSRM) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for SSR Mining
How Much Debt Does SSR Mining Carry?
The image below, which you can click on for greater detail, shows that SSR Mining had debt of US$298.3m at the end of December 2022, a reduction from US$367.0m over a year. But it also has US$695.7m in cash to offset that, meaning it has US$397.4m net cash.
How Healthy Is SSR Mining's Balance Sheet?
The latest balance sheet data shows that SSR Mining had liabilities of US$279.3m due within a year, and liabilities of US$849.2m falling due after that. Offsetting these obligations, it had cash of US$695.7m as well as receivables valued at US$117.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$315.1m.
Since publicly traded SSR Mining shares are worth a total of US$3.18b, it seems unlikely that this level of liabilities would be a major threat. 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, SSR Mining boasts net cash, so it's fair to say it does not have a heavy debt load!
It is just as well that SSR Mining's load is not too heavy, because its EBIT was down 65% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine SSR Mining'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While SSR Mining has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, SSR Mining recorded free cash flow worth 67% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.
Summing Up
While it is always sensible to look at a company's total liabilities, it is very reassuring that SSR Mining has US$397.4m in net cash. And it impressed us with free cash flow of US$23m, being 67% of its EBIT. So we are not troubled with SSR Mining's debt use. 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. To that end, you should be aware of the 3 warning signs we've spotted with SSR Mining .
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.
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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.
About TSX:SSRM
SSR Mining
Engages in the operation, acquisition, exploration, and development of precious metal resource properties in the United States, Türkiye, Canada, and Argentina.
Flawless balance sheet and undervalued.