These 4 Measures Indicate That Fresnillo (LON:FRES) Is Using Debt Safely

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. As with many other companies Fresnillo plc (LON:FRES) makes use of debt. But is this debt a concern to shareholders?

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What Risk Does Debt Bring?

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 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, 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 examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Fresnillo Carry?

As you can see below, Fresnillo had US$839.6m of debt at June 2025, down from US$890.3m a year prior. But it also has US$1.82b in cash to offset that, meaning it has US$983.3m net cash.

A Look At Fresnillo's Liabilities

The latest balance sheet data shows that Fresnillo had liabilities of US$557.0m due within a year, and liabilities of US$1.17b falling due after that. Offsetting these obligations, it had cash of US$1.82b as well as receivables valued at US$532.3m due within 12 months. So it can boast US$629.4m more liquid assets than total liabilities.

Having regard to Fresnillo's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$32.3b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Fresnillo has more cash than debt is arguably a good indication that it can manage its debt safely.

Check out our latest analysis for Fresnillo

Better yet, Fresnillo grew its EBIT by 180% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Fresnillo 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. During the last three years, Fresnillo generated free cash flow amounting to a very robust 97% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Fresnillo has net cash of US$983.3m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$1.6b, being 97% of its EBIT. 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. Case in point: We've spotted 1 warning sign for Fresnillo 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.