David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We note that SSR Mining Inc. (TSE:SSRM) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
What Is SSR Mining's Net Debt?
As you can see below, SSR Mining had US$349.5m of debt at March 2022, down from US$375.0m a year prior. However, it does have US$1.03b in cash offsetting this, leading to net cash of US$683.8m.
How Strong Is SSR Mining's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that SSR Mining had liabilities of US$278.5m due within 12 months and liabilities of US$848.1m due beyond that. On the other hand, it had cash of US$1.03b and US$132.7m worth of receivables due within a year. So it actually has US$39.3m more liquid assets than total liabilities.
Having regard to SSR Mining's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$4.33b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that SSR Mining has more cash than debt is arguably a good indication that it can manage its debt safely.
In addition to that, we're happy to report that SSR Mining has boosted its EBIT by 32%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine SSR 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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While SSR 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. During the last three years, SSR Mining produced sturdy free cash flow equating to 69% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.
While it is always sensible to investigate a company's debt, in this case SSR Mining has US$683.8m in net cash and a decent-looking balance sheet. And we liked the look of last year's 32% year-on-year EBIT growth. So is SSR Mining's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for SSR Mining (of which 1 can't be ignored!) 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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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.