Is Hecla Mining (NYSE: HL) Using Too Much Debt?
Legendary fund manager Li Lu (whom Charlie Munger supported) once said, “The biggest risk in investing is not price volatility, but the possibility that you will suffer a permanent loss of capital.” So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Like many other companies Hecla mining company (NYSE: HL) uses debt. But the most important question is: what risk does this debt create?
When is debt dangerous?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. If things really go wrong, lenders can take over the business. 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, many companies use debt to finance their growth without negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
Check out our latest review for Hecla Mining
What is Hecla Mining’s debt?
As you can see below, Hecla Mining had a debt of US $ 507.7 million, as of September 2021, which is roughly the same as the year before. You can click on the graph for more details. However, because it has a cash reserve of US $ 190.9 million, its net debt is less, at around US $ 316.8 million.
How strong is Hecla Mining’s balance sheet?
The latest balance sheet data shows that Hecla Mining had debts of US $ 126.2 million due within one year, and debts of US $ 805.3 million due thereafter. On the other hand, he had $ 190.9 million in cash and $ 43.0 million in receivables due within a year. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by $ 697.6 million.
Hecla Mining has a market capitalization of US $ 2.76 billion, so it could very likely raise funds to improve its balance sheet, should the need arise. But it is clear that it is absolutely necessary to take a close look at whether it can manage its debt without dilution.
We use two main ratios to inform us about the levels of debt compared to earnings. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its earnings before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
Hecla Mining has a very low debt / EBITDA ratio of 1.1; it is therefore strange to see poor interest coverage, as last year’s EBIT was only 2.2 times interest expense. So while we are not necessarily alarmed, we think his debt is far from negligible. It is important to note that Hecla Mining has increased its EBIT by 49% over the past twelve months, and this growth will make it easier to process its debt. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Hecla Mining 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.
Finally, a business can only pay off its debts with hard cash, not with book profits. The logical step is therefore to examine the proportion of this EBIT that corresponds to the actual free cash flow. Over the past two years, Hecla Mining has actually generated more free cash flow than EBIT. This kind of cash conversion makes us as excited as the crowd when the beat drops at a Daft Punk concert.
Our point of view
The good news is that Hecla Mining’s demonstrated ability to convert EBIT into free cash flow delights us like a fluffy puppy does a toddler. But the hard truth is that we are concerned about its coverage of interest. When we consider the range of factors above, it looks like Hecla Mining is pretty reasonable with its use of debt. While this carries some risk, it can also improve returns for shareholders. When analyzing debt levels, the balance sheet is the obvious place to start. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we discovered 2 warning signs for Hecla Mining which you should know before investing here.
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash-flow net-growth stocks.
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