Here's Why Molibdenos y Metales (SNSE:MOLYMET) Has A Meaningful Debt Burden

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Molibdenos y Metales S.A. (SNSE:MOLYMET) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. 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, 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.

View our latest analysis for Molibdenos y Metales

What Is Molibdenos y Metales's Debt?

As you can see below, Molibdenos y Metales had US$242.0m of debt at September 2020, down from US$279.6m a year prior. However, its balance sheet shows it holds US$250.4m in cash, so it actually has US$8.46m net cash.

How Healthy Is Molibdenos y Metales's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Molibdenos y Metales had liabilities of US$165.6m due within 12 months and liabilities of US$349.9m due beyond that. Offsetting this, it had US$250.4m in cash and US$90.9m in receivables that were due within 12 months. So its liabilities total US$174.3m more than the combination of its cash and short-term receivables.

Given Molibdenos y Metales has a market capitalization of US$979.5m, 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. Despite its noteworthy liabilities, Molibdenos y Metales boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, Molibdenos y Metales's EBIT fell a jaw-dropping 44% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Molibdenos y Metales will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Molibdenos y Metales may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, Molibdenos y Metales recorded free cash flow of 49% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

Although Molibdenos y Metales's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$8.46m. So while Molibdenos y Metales does not have a great balance sheet, it's certainly not too bad. 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 example, we've discovered 2 warning signs for Molibdenos y Metales that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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