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Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Great Panther Mining Limited (TSE:GPR) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Great Panther Mining Carry?
You can click the graphic below for the historical numbers, but it shows that Great Panther Mining had US$33.4m of debt in December 2020, down from US$42.7m, one year before. However, its balance sheet shows it holds US$63.4m in cash, so it actually has US$30.0m net cash.
A Look At Great Panther Mining's Liabilities
We can see from the most recent balance sheet that Great Panther Mining had liabilities of US$88.1m falling due within a year, and liabilities of US$80.6m due beyond that. Offsetting this, it had US$63.4m in cash and US$15.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$90.0m.
While this might seem like a lot, it is not so bad since Great Panther Mining has a market capitalization of US$302.1m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Great Panther Mining also has more cash than debt, so we're pretty confident it can manage its debt safely.
It was also good to see that despite losing money on the EBIT line last year, Great Panther Mining turned things around in the last 12 months, delivering and EBIT of US$56m. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Great Panther Mining can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Great Panther Mining 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. In the last year, Great Panther Mining's free cash flow amounted to 48% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
Although Great Panther Mining'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$30.0m. So we are not troubled with Great Panther Mining's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 3 warning signs we've spotted with Great Panther Mining .
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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. 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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