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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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Maverix Metals Inc. (TSE:MMX) makes use of debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Maverix Metals's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Maverix Metals had US$23.5m of debt in September 2021, down from US$35.0m, one year before. However, its balance sheet shows it holds US$44.6m in cash, so it actually has US$21.1m net cash.
How Healthy Is Maverix Metals' Balance Sheet?
According to the last reported balance sheet, Maverix Metals had liabilities of US$3.99m due within 12 months, and liabilities of US$27.0m due beyond 12 months. On the other hand, it had cash of US$44.6m and US$6.97m worth of receivables due within a year. So it can boast US$20.5m more liquid assets than total liabilities.
This surplus suggests that Maverix Metals has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Maverix Metals has more cash than debt is arguably a good indication that it can manage its debt safely.
Even more impressive was the fact that Maverix Metals grew its EBIT by 524% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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 Maverix Metals's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Maverix Metals 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. Happily for any shareholders, Maverix Metals actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
While we empathize with investors who find debt concerning, you should keep in mind that Maverix Metals has net cash of US$21.1m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$55m, being 120% of its EBIT. So we don't think Maverix Metals's use of debt is risky. 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. To that end, you should learn about the 4 warning signs we've spotted with Maverix Metals (including 1 which is concerning) .
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.