Hochschild Mining (LON:HOC) Could Easily Take On More 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Hochschild Mining plc (LON:HOC) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Hochschild Mining

What Is Hochschild Mining's Debt?

You can click the graphic below for the historical numbers, but it shows that Hochschild Mining had US$209.8m of debt in June 2021, down from US$227.1m, one year before. But on the other hand it also has US$256.9m in cash, leading to a US$47.1m net cash position.

How Strong Is Hochschild Mining's Balance Sheet?

The latest balance sheet data shows that Hochschild Mining had liabilities of US$195.2m due within a year, and liabilities of US$376.7m falling due after that. Offsetting this, it had US$256.9m in cash and US$90.4m in receivables that were due within 12 months. So it has liabilities totalling US$224.5m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Hochschild Mining has a market capitalization of US$835.6m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Hochschild Mining also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Hochschild Mining grew its EBIT by 142% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Hochschild Mining can strengthen its balance sheet over time. 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. Hochschild Mining 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, Hochschild Mining produced sturdy free cash flow equating to 66% 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 Hochschild Mining does have more liabilities than liquid assets, it also has net cash of US$47.1m. And we liked the look of last year's 142% year-on-year EBIT growth. So is Hochschild Mining'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. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Hochschild Mining , 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.

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.

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