Yahoo Finance Here's Why First Majestic Silver (TSE:FR) Can Manage Its Debt Responsibly
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. So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies First Majestic Silver Corp. (TSE:FR) makes use of debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for First Majestic Silver
What Is First Majestic Silver's Debt?
As you can see below, at the end of December 2019, First Majestic Silver had US$155.8m of debt, up from US$149.5m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$175.5m in cash, so it actually has US$19.7m net cash.
A Look At First Majestic Silver's Liabilities
According to the last reported balance sheet, First Majestic Silver had liabilities of US$71.9m due within 12 months, and liabilities of US$293.8m due beyond 12 months. Offsetting this, it had US$175.5m in cash and US$33.9m in receivables that were due within 12 months. So it has liabilities totalling US$156.2m more than its cash and near-term receivables, combined.
Given First Majestic Silver has a market capitalization of US$1.58b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, First Majestic Silver boasts net cash, so it's fair to say it does not have a heavy debt load!
We also note that First Majestic Silver improved its EBIT from a last year's loss to a positive US$682k. 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 First Majestic Silver'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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. First Majestic Silver 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. Happily for any shareholders, First Majestic Silver actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Summing up
While it is always sensible to look at a company's total liabilities, it is very reassuring that First Majestic Silver has US$19.7m in net cash. The cherry on top was that in converted 3140% of that EBIT to free cash flow, bringing in US$21m. So we don't have any problem with First Majestic Silver's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for First Majestic Silver you should be aware of.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.
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