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.' 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. As with many other companies Avino Silver & Gold Mines Ltd. (TSE:ASM) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
What Is Avino Silver & Gold Mines's Debt?
The image below, which you can click on for greater detail, shows that Avino Silver & Gold Mines had debt of US$7.39m at the end of June 2019, a reduction from US$12.5m over a year. However, because it has a cash reserve of US$3.41m, its net debt is less, at about US$3.99m.
How Strong Is Avino Silver & Gold Mines's Balance Sheet?
We can see from the most recent balance sheet that Avino Silver & Gold Mines had liabilities of US$10.5m falling due within a year, and liabilities of US$22.3m due beyond that. Offsetting these obligations, it had cash of US$3.41m as well as receivables valued at US$6.26m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$23.2m.
Avino Silver & Gold Mines has a market capitalization of US$46.3m, 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. 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 Avino Silver & Gold Mines'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, Avino Silver & Gold Mines saw its revenue drop to US$31m, which is a fall of 9.7%. That's not what we would hope to see.
Importantly, Avino Silver & Gold Mines had negative earnings before interest and tax (EBIT), over the last year. Indeed, it lost US$1.6m at the EBIT level. 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. However, it doesn't help that it burned through US$4.2m of cash over the last year. So in short it's a really risky stock. For riskier companies like Avino Silver & Gold Mines I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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.
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