Yahoo Finance Ero Copper (TSE:ERO) Has A Rock Solid Balance Sheet
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.' 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. We can see that Ero Copper Corp. (TSE:ERO) does use debt in its business. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Ero Copper
What Is Ero Copper's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Ero Copper had US$55.4m of debt in September 2021, down from US$172.7m, one year before. But it also has US$119.1m in cash to offset that, meaning it has US$63.7m net cash.
How Strong Is Ero Copper's Balance Sheet?
The latest balance sheet data shows that Ero Copper had liabilities of US$105.7m due within a year, and liabilities of US$167.6m falling due after that. Offsetting this, it had US$119.1m in cash and US$33.5m in receivables that were due within 12 months. So its liabilities total US$120.8m more than the combination of its cash and short-term receivables.
Given Ero Copper has a market capitalization of US$1.61b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Ero Copper boasts net cash, so it's fair to say it does not have a heavy debt load!
Better yet, Ero Copper grew its EBIT by 114% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. 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 Ero Copper 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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Ero Copper 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. During the last three years, Ero Copper produced sturdy free cash flow equating to 50% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Summing up
We could understand if investors are concerned about Ero Copper's liabilities, but we can be reassured by the fact it has has net cash of US$63.7m. And we liked the look of last year's 114% year-on-year EBIT growth. So is Ero Copper's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Ero Copper has 1 warning sign we think you should be aware of.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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.
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