These 4 Measures Indicate That Andean Precious Metals (CVE:APM) Is Using Debt Extensively

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. As with many other companies Andean Precious Metals Corp. (CVE:APM) 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Andean Precious Metals

How Much Debt Does Andean Precious Metals Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Andean Precious Metals had debt of US$59.9m, up from none in one year. But it also has US$71.3m in cash to offset that, meaning it has US$11.4m net cash.

How Strong Is Andean Precious Metals' Balance Sheet?

We can see from the most recent balance sheet that Andean Precious Metals had liabilities of US$52.2m falling due within a year, and liabilities of US$97.7m due beyond that. Offsetting these obligations, it had cash of US$71.3m as well as receivables valued at US$4.79m due within 12 months. So its liabilities total US$73.8m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of US$110.0m, so it does suggest shareholders should keep an eye on Andean Precious Metals' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Andean Precious Metals boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Andean Precious Metals turned things around in the last 12 months, delivering and EBIT of US$3.3m. 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 Andean Precious Metals'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Andean Precious Metals 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 last year, Andean Precious Metals saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While Andean Precious Metals does have more liabilities than liquid assets, it also has net cash of US$11.4m. So although we see some areas for improvement, we're not too worried about Andean Precious Metals's balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Andean Precious Metals .

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.

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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.