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Is First Majestic Silver (TSE:FR) Using Too Much Debt?

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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 First Majestic Silver Corp. (TSE:FR) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 First Majestic Silver

What Is First Majestic Silver's Debt?

As you can see below, at the end of March 2022, First Majestic Silver had US$183.6m of debt, up from US$153.7m a year ago. Click the image for more detail. However, it does have US$220.9m in cash offsetting this, leading to net cash of US$37.3m.

debt-equity-history-analysis
debt-equity-history-analysis

How Healthy Is First Majestic Silver's Balance Sheet?

The latest balance sheet data shows that First Majestic Silver had liabilities of US$156.7m due within a year, and liabilities of US$538.8m falling due after that. On the other hand, it had cash of US$220.9m and US$42.5m worth of receivables due within a year. So its liabilities total US$432.1m more than the combination of its cash and short-term receivables.

Given First Majestic Silver has a market capitalization of US$2.16b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, First Majestic Silver boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, First Majestic Silver's EBIT fell a jaw-dropping 53% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if First Majestic Silver can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While First Majestic Silver 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. Over the last three years, First Majestic Silver saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

Although First Majestic Silver's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$37.3m. Despite the cash, we do find First Majestic Silver's EBIT growth rate concerning, so we're not particularly comfortable with the stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - First Majestic Silver has 5 warning signs we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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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