Fresnillo (LON:FRES) Has A Rock Solid Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Fresnillo plc (LON:FRES) does carry debt. But the more important question is: how much risk is that debt creating?

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When Is Debt A Problem?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Fresnillo Carry?

You can click the graphic below for the historical numbers, but it shows that Fresnillo had US$841.6m of debt in December 2024, down from US$934.4m, one year before. But it also has US$1.30b in cash to offset that, meaning it has US$456.3m net cash.

How Healthy Is Fresnillo's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Fresnillo had liabilities of US$368.6m due within 12 months and liabilities of US$1.30b due beyond that. On the other hand, it had cash of US$1.30b and US$674.2m worth of receivables due within a year. So it can boast US$301.9m more liquid assets than total liabilities.

This short term liquidity is a sign that Fresnillo could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Fresnillo has more cash than debt is arguably a good indication that it can manage its debt safely.

See our latest analysis for Fresnillo

Even more impressive was the fact that Fresnillo grew its EBIT by 361% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Fresnillo's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Fresnillo 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. During the last three years, Fresnillo produced sturdy free cash flow equating to 69% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Fresnillo has US$456.3m in net cash and a decent-looking balance sheet. And we liked the look of last year's 361% year-on-year EBIT growth. So is Fresnillo's debt a risk? It doesn't seem so to us. 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. We've identified 2 warning signs with Fresnillo , and understanding them should be part of your investment process.

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.

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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.