Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Maverix Metals Inc. (TSE:MMX) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 think about a company's use of debt, we first look at cash and debt together.
What Is Maverix Metals's Net Debt?
The image below, which you can click on for greater detail, shows that at March 2022 Maverix Metals had debt of US$12.5m, up from none in one year. However, its balance sheet shows it holds US$14.2m in cash, so it actually has US$1.70m net cash.
A Look At Maverix Metals' Liabilities
We can see from the most recent balance sheet that Maverix Metals had liabilities of US$2.04m falling due within a year, and liabilities of US$18.8m due beyond that. Offsetting these obligations, it had cash of US$14.2m as well as receivables valued at US$9.79m due within 12 months. So it actually has US$3.16m more liquid assets than total liabilities.
Having regard to Maverix Metals' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$665.9m company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Maverix Metals has more cash than debt is arguably a good indication that it can manage its debt safely.
On the other hand, Maverix Metals's EBIT dived 15%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. 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 Maverix Metals 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. Maverix Metals 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. Over the last two years, Maverix Metals actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
While it is always sensible to investigate a company's debt, in this case Maverix Metals has US$1.70m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 210% of that EBIT to free cash flow, bringing in US$3.3m. So we are not troubled with Maverix Metals's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Maverix Metals you should know about.
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.
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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.