Stock Analysis

Does Triple Flag Precious Metals (TSE:TFPM) Have A Healthy Balance Sheet?

TSX:TFPM
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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Triple Flag Precious Metals Corp. (TSE:TFPM) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Triple Flag Precious Metals

How Much Debt Does Triple Flag Precious Metals Carry?

The image below, which you can click on for greater detail, shows that at September 2023 Triple Flag Precious Metals had debt of US$65.0m, up from none in one year. However, because it has a cash reserve of US$14.3m, its net debt is less, at about US$50.7m.

debt-equity-history-analysis
TSX:TFPM Debt to Equity History February 6th 2024

How Healthy Is Triple Flag Precious Metals' Balance Sheet?

The latest balance sheet data shows that Triple Flag Precious Metals had liabilities of US$12.5m due within a year, and liabilities of US$71.5m falling due after that. Offsetting this, it had US$14.3m in cash and US$18.2m in receivables that were due within 12 months. So its liabilities total US$51.5m more than the combination of its cash and short-term receivables.

Since publicly traded Triple Flag Precious Metals shares are worth a total of US$2.55b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Triple Flag Precious Metals has a low net debt to EBITDA ratio of only 0.37. And its EBIT easily covers its interest expense, being 16.9 times the size. So we're pretty relaxed about its super-conservative use of debt. But the bad news is that Triple Flag Precious Metals has seen its EBIT plunge 14% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Triple Flag Precious Metals can strengthen its balance sheet over time. 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. So it's worth checking how much of that EBIT is backed by free cash flow. Over the most recent three years, Triple Flag Precious Metals recorded free cash flow worth 50% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

Triple Flag Precious Metals's interest cover was a real positive on this analysis, as was its net debt to EBITDA. But truth be told its EBIT growth rate had us nibbling our nails. Considering this range of data points, we think Triple Flag Precious Metals is in a good position to manage its debt levels. But a word of caution: we think debt levels are high enough to justify ongoing monitoring. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Triple Flag Precious Metals , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

Valuation is complex, but we're helping make it simple.

Find out whether Triple Flag Precious Metals is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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:TFPM

Triple Flag Precious Metals

A precious-metals-focused streaming and royalty company, engages in acquiring and managing precious metals, streams, royalties and other mineral interests in Australia, Canada, Colombia, Cote d’Ivoire, Honduras, Mexico, Mongolia, Peru, South Africa, the United States, and internationally.

Flawless balance sheet with moderate growth potential.