Here's Why Minera Valparaiso (SNSE:MINERA) Has A Meaningful Debt Burden

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 Minera Valparaiso S.A. (SNSE:MINERA) makes use of debt. 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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Minera Valparaiso

What Is Minera Valparaiso's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2021 Minera Valparaiso had debt of US$1.87b, up from US$1.67b in one year. However, it does have US$2.20b in cash offsetting this, leading to net cash of US$329.3m.

How Healthy Is Minera Valparaiso's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Minera Valparaiso had liabilities of US$1.44b due within 12 months and liabilities of US$3.04b due beyond that. Offsetting these obligations, it had cash of US$2.20b as well as receivables valued at US$749.7m due within 12 months. So it has liabilities totalling US$1.53b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of US$2.11b, so it does suggest shareholders should keep an eye on Minera Valparaiso's 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, Minera Valparaiso boasts net cash, so it's fair to say it does not have a heavy debt load!

Shareholders should be aware that Minera Valparaiso's EBIT was down 45% last year. 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 Minera Valparaiso will need earnings to service that debt. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Minera Valparaiso 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. Happily for any shareholders, Minera Valparaiso actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While Minera Valparaiso does have more liabilities than liquid assets, it also has net cash of US$329.3m. And it impressed us with free cash flow of US$290m, being 123% of its EBIT. So while Minera Valparaiso does not have a great balance sheet, it's certainly not too bad. 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 instance, we've identified 2 warning signs for Minera Valparaiso that you should be aware of.

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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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.