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.' 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. As with many other companies McEwen Mining Inc. (NYSE:MUX) makes use of debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does McEwen Mining Carry?
As you can see below, McEwen Mining had US$48.7m of debt, at September 2021, which is about the same as the year before. You can click the chart for greater detail. But it also has US$64.9m in cash to offset that, meaning it has US$16.3m net cash.
How Strong Is McEwen Mining's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that McEwen Mining had liabilities of US$46.3m due within 12 months and liabilities of US$82.6m due beyond that. Offsetting this, it had US$64.9m in cash and US$1.68m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$62.3m.
Of course, McEwen Mining has a market capitalization of US$422.5m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, McEwen Mining also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 McEwen Mining's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year McEwen Mining wasn't profitable at an EBIT level, but managed to grow its revenue by 18%, to US$129m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
So How Risky Is McEwen Mining?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months McEwen Mining lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$54m of cash and made a loss of US$59m. Given it only has net cash of US$16.3m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for McEwen Mining you should know about.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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