Health Check: How Prudently Does Minera Frisco. de (BMV:MFRISCOA-1) Use Debt?

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.' 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. As with many other companies Minera Frisco, S.A.B. de C.V. (BMV:MFRISCOA-1) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Minera Frisco. de

What Is Minera Frisco. de's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Minera Frisco. de had Mex$26.6b of debt, an increase on Mex$21.0b, over one year. However, because it has a cash reserve of Mex$2.54b, its net debt is less, at about Mex$24.1b.

A Look At Minera Frisco. de's Liabilities

The latest balance sheet data shows that Minera Frisco. de had liabilities of Mex$6.77b due within a year, and liabilities of Mex$28.3b falling due after that. Offsetting these obligations, it had cash of Mex$2.54b as well as receivables valued at Mex$2.59b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by Mex$30.0b.

When you consider that this deficiency exceeds the company's Mex$25.9b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Minera Frisco. de's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Minera Frisco. de made a loss at the EBIT level, and saw its revenue drop to Mex$9.7b, which is a fall of 10.0%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Minera Frisco. de produced an earnings before interest and tax (EBIT) loss. Indeed, it lost Mex$462m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through Mex$7.3b in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. 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. To that end, you should learn about the 3 warning signs we've spotted with Minera Frisco. de (including 2 which make us uncomfortable) .

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. 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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