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. We note that Guanajuato Silver Company Ltd. (CVE:GSVR) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Guanajuato Silver
How Much Debt Does Guanajuato Silver Carry?
As you can see below, Guanajuato Silver had US$12.5m of debt at September 2023, down from US$13.0m a year prior. However, it does have US$3.63m in cash offsetting this, leading to net debt of about US$8.86m.
A Look At Guanajuato Silver’s Liabilities
Zooming in on the latest balance sheet data, we can see that Guanajuato Silver had liabilities of US$40.5m due within 12 months and liabilities of US$18.6m due beyond that. On the other hand, it had cash of US$3.63m and US$10.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$44.6m.
This is a mountain of leverage relative to its market capitalization of US$51.4m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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 Guanajuato Silver’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.
Over 12 months, Guanajuato Silver reported revenue of US$65m, which is a gain of 155%, although it did not report any earnings before interest and tax. So there’s no doubt that shareholders are cheering for growth
Caveat Emptor
Despite the top line growth, Guanajuato Silver still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping US$28m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$14m in negative free cash flow over the last twelve months. So in short it’s a really risky stock. 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. For instance, we’ve identified 4 warning signs for Guanajuato Silver (1 shouldn’t be ignored) you should be aware of.
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.
Valuation is complex, but we’re helping make it simple.
Find out whether Guanajuato Silver is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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.