Australia markets open in 3 hours 50 minutes
  • ALL ORDS

    6,784.30
    -33.80 (-0.50%)
     
  • AUD/USD

    0.6785
    -0.0014 (-0.21%)
     
  • ASX 200

    6,594.50
    -34.80 (-0.52%)
     
  • OIL

    98.40
    -1.10 (-1.11%)
     
  • GOLD

    1,738.40
    -25.50 (-1.45%)
     
  • BTC-AUD

    29,945.06
    -319.77 (-1.06%)
     
  • CMC Crypto 200

    440.60
    +5.08 (+1.17%)
     

Is Endeavour Mining (TSE:EDV) A Risky Investment?

  • Oops!
    Something went wrong.
    Please try again later.
·4-min read
In this article:
  • Oops!
    Something went wrong.
    Please try again later.

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Endeavour Mining plc (TSE:EDV) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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, 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.

See our latest analysis for Endeavour Mining

What Is Endeavour Mining's Debt?

The image below, which you can click on for greater detail, shows that at December 2021 Endeavour Mining had debt of US$841.9m, up from US$688.3m in one year. However, it does have US$906.2m in cash offsetting this, leading to net cash of US$64.3m.

debt-equity-history-analysis
debt-equity-history-analysis

How Strong Is Endeavour Mining's Balance Sheet?

The latest balance sheet data shows that Endeavour Mining had liabilities of US$567.1m due within a year, and liabilities of US$1.82b falling due after that. On the other hand, it had cash of US$906.2m and US$96.1m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$1.38b.

Endeavour Mining has a market capitalization of US$6.50b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Endeavour Mining also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Endeavour Mining grew its EBIT by 33% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Endeavour Mining'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Endeavour Mining 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, Endeavour Mining actually produced more free cash flow than EBIT over the last two years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

Although Endeavour 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$64.3m. The cherry on top was that in converted 129% of that EBIT to free cash flow, bringing in US$644m. So we don't think Endeavour Mining's use of debt is risky. 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 example, we've discovered 2 warning signs for Endeavour Mining that you should be aware of before investing here.

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.

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.

Our goal is to create a safe and engaging place for users to connect over interests and passions. In order to improve our community experience, we are temporarily suspending article commenting