David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. We note that Hecla Mining Company (NYSE:HL) has debt on its balance sheet. But does this debt worry shareholders?
When is debt a problem?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. In the worst case, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. The first step when considering a company’s debt levels is to consider its cash and debt together.
Check out our latest analysis for Hecla Mining
What is Hecla Mining’s debt?
The graph below, which you can click on for more details, shows that Hecla Mining had debt of US$508.1 million as of December 2021; about the same as the previous year. However, since he has a cash reserve of $210.0 million, his net debt is less, at around $298.1 million.
A look at Hecla Mining’s liabilities
Zooming in on the latest balance sheet data, we can see that Hecla Mining had liabilities of US$160.4 million due within 12 months and liabilities of US$807.6 million due beyond. On the other hand, it had a cash position of 210.0 million dollars and 44.6 million dollars of receivables at less than one year. Thus, its liabilities outweigh the sum of its cash and receivables (current) by $713.4 million.
Given that Hecla Mining has a market cap of US$3.68 billion, it’s hard to believe that these liabilities pose a big threat. But there are enough liabilities that we certainly recommend that shareholders continue to monitor the balance sheet in the future.
In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
While Hecla Mining’s low debt-to-EBITDA ratio of 1.0 suggests only modest use of debt, the fact that EBIT covered interest expense only 2.9 times last year makes think. But the interest payments are certainly enough to make us think about the affordability of its debt. It is also relevant to note that Hecla Mining has increased its EBIT by a very respectable 29% over the past year, improving its ability to repay debt. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future earnings, more than anything, that will determine Hecla Mining’s ability to maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a business needs free cash flow to pay off its debts; book profits are not enough. So the logical step is to look at what proportion of that EBIT is actual free cash flow. Over the past two years, Hecla Mining has generated free cash flow of a very strong 94% of EBIT, more than expected. This puts him in a very strong position to pay off the debt.
Our point of view
Hecla Mining’s conversion of EBIT to free cash flow suggests it can manage its debt as easily as Cristiano Ronaldo could score a goal against an under-14 keeper. But the hard truth is that we are concerned about his coverage of interests. Overall, we think Hecla Mining’s use of debt seems entirely reasonable and we are not concerned about that. After all, reasonable leverage can increase return on equity. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist outside of the balance sheet. These risks can be difficult to spot. Every business has them, and we’ve spotted 2 warning signs for Hecla Mining you should know.
In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.