Is Americas Gold and Silver (TSE:USA) Using Debt Sensibly?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Americas Gold and Silver Corporation (TSE:USA) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 Americas Gold and Silver

What Is Americas Gold and Silver's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Americas Gold and Silver had debt of US$20.6m, up from US$14.8m in one year. However, it also had US$3.90m in cash, and so its net debt is US$16.7m.

How Strong Is Americas Gold and Silver's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Americas Gold and Silver had liabilities of US$51.9m due within 12 months and liabilities of US$61.7m due beyond that. Offsetting these obligations, it had cash of US$3.90m as well as receivables valued at US$8.17m due within 12 months. So it has liabilities totalling US$101.6m more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's US$75.4m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Americas Gold and 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.

Over 12 months, Americas Gold and Silver reported revenue of US$87m, which is a gain of 7.8%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Americas Gold and Silver had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping US$28m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of US$21m over the last twelve months. So suffice it to say we consider the stock to be risky. 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. For instance, we've identified 4 warning signs for Americas Gold and Silver (2 don't sit too well with us) 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.

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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.