Santacruz Silver Mining (CVE:SCZ) Is Making Moderate Use Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Santacruz Silver Mining Ltd. (CVE:SCZ) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Santacruz Silver Mining

What Is Santacruz Silver Mining's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 Santacruz Silver Mining had US$15.7m of debt, an increase on US$6.64m, over one year. However, it does have US$9.31m in cash offsetting this, leading to net debt of about US$6.42m.

A Look At Santacruz Silver Mining's Liabilities

Zooming in on the latest balance sheet data, we can see that Santacruz Silver Mining had liabilities of US$42.0m due within 12 months and liabilities of US$14.2m due beyond that. Offsetting these obligations, it had cash of US$9.31m as well as receivables valued at US$17.8m due within 12 months. So it has liabilities totalling US$29.1m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Santacruz Silver Mining is worth US$68.6m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Santacruz Silver Mining's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Santacruz Silver Mining wasn't profitable at an EBIT level, but managed to grow its revenue by 25%, to US$44m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Santacruz Silver Mining's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost US$3.0m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$28m of cash over the last year. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example Santacruz Silver Mining has 5 warning signs (and 2 which are a bit concerning) we think you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.

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