Howard Marks put it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried. When we think about how risky a business is, we always like to look at its use of debt, because overloading debt how to file bankruptcy. We can see that Agnico Eagle Mines Limited (NYSE: AEM) uses debt in his business. But the most important question is: what risk does this debt create?
Why Does Debt Bring Risk?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution of a business with the ability to reinvest at high rates of return. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
What is the debt of Agnico Eagle Mines?
The image below, which you can click for more details, shows Agnico Eagle Mines owed $ 1.57 billion in debt at the end of December 2020, a reduction from $ 1.72 billion. of US dollars over one year. However, it has $ 406.5 million in cash offsetting that, which leads to net debt of around $ 1.16 billion.
How strong is Agnico Eagle Mines’ balance sheet?
According to the latest published balance sheet, Agnico Eagle Mines had liabilities of US $ 515.7 million due within 12 months and liabilities of US $ 3.42 billion due beyond 12 months. In return, he had $ 406.5 million in cash and $ 15.5 million in receivables due within 12 months. It therefore has liabilities totaling US $ 3.51 billion more than its cash and short-term receivables combined.
While that might sound like a lot, it’s not that bad since Agnico Eagle Mines has a massive market cap of US $ 13.6 billion, so it could likely strengthen its balance sheet by raising capital if needed. But it is clear that it is absolutely necessary to take a close look at whether it can manage its debt without dilution.
We measure a company’s indebtedness relative to its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating the ease with which its earnings before interest and taxes (EBIT ) covers its interests. costs (interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
Agnico Eagle Mines has a net debt of only 0.74 times EBITDA, indicating that it is certainly not a reckless borrower. And it has 9.8 times interest coverage, which is more than enough. Another good thing is that Agnico Eagle Mines has increased its EBIT to 11% over the past year, further increasing its ability to manage its debt. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Agnico Eagle Mines can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. The logical step is therefore to examine the proportion of this EBIT that corresponds to the actual free cash flow. Looking at the past three years, Agnico Eagle Mines has actually experienced an overall outflow. Debt is generally more expensive and almost always riskier in the hands of a business with negative free cash flow. Shareholders should hope for improvement.
Our point of view
The conversion of Agnico Eagle Mines EBIT to free cash flow was very negative in this analysis, although the other factors we considered were considerably better. There is no doubt that his ability to cover his interest costs with his EBIT is pretty flash. When we consider all of the factors mentioned above, we feel a little cautious about Agnico Eagle Mines’ use of debt. While we understand that debt can improve returns on equity, we suggest shareholders watch their debt level closely, lest they increase. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. Concrete example: we have spotted 4 warning signs for Agnico Eagle Mines you need to be aware of it, and one of them is a little rude.
At the end of the day, it’s often best to focus on businesses that don’t have net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
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