Here's Why Sierra Madre Gold and Silver (CVE:SM) Can Afford Some Debt

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Sierra Madre Gold and Silver Ltd. (CVE:SM) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Sierra Madre Gold and Silver

What Is Sierra Madre Gold and Silver's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Sierra Madre Gold and Silver had debt of US$5.30m, up from none in one year. However, it also had US$335.8k in cash, and so its net debt is US$4.96m.

A Look At Sierra Madre Gold and Silver's Liabilities

The latest balance sheet data shows that Sierra Madre Gold and Silver had liabilities of US$1.37m due within a year, and liabilities of US$8.25m falling due after that. Offsetting these obligations, it had cash of US$335.8k as well as receivables valued at US$1.80m due within 12 months. So it has liabilities totalling US$7.48m more than its cash and near-term receivables, combined.

Given Sierra Madre Gold and Silver has a market capitalization of US$60.2m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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 Sierra Madre Gold and Silver can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

While it hasn't made a profit, at least Sierra Madre Gold and Silver booked its first revenue as a publicly listed company, in the last twelve months.

Caveat Emptor

Over the last twelve months Sierra Madre Gold and Silver produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping US$8.0m. 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$9.6m of cash over the last year. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Sierra Madre Gold and Silver (of which 1 doesn't sit too well with us!) you should know about.

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.