Here’s Why Yamana Gold (TSE:YRI) Has Significant Leverage

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Warren Buffett said: “Volatility is far from synonymous with risk. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. We note that Yamana Gold Inc. (TSE:YRI) has debt on its balance sheet. But does this debt worry shareholders?

When is debt a problem?

Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. If things go really bad, lenders can take over the business. However, a more usual (but still expensive) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, many companies use debt to finance their growth, without any negative consequences. The first step when considering a company’s debt levels is to consider its cash and debt together.

Check out our latest analysis for Yamana Gold

What is Yamana Gold’s debt?

You can click on the chart below for historical numbers, but it shows Yamana Gold had $773.2 million in debt in March 2022, up from $1.02 billion a year prior. However, since he has a cash reserve of $516.4 million, his net debt is less, at around $256.8 million.

TSX:YRI Debt to Equity May 17, 2022

A Look at Yamana Gold’s Responsibilities

The latest balance sheet data shows that Yamana Gold had liabilities of US$409.0 million due within one year, and liabilities of US$2.74 billion falling due thereafter. On the other hand, it had a cash position of 516.4 million dollars and 4.80 million dollars of receivables at less than one year. Thus, its liabilities outweigh the sum of its cash and (current) receivables by $2.63 billion.

While that might sound like a lot, it’s not that bad since Yamana Gold has a market capitalization of US$4.72 billion, so it could likely bolster its balance sheet by raising capital if needed. But it is clear that it is essential to examine closely whether it can manage its debt without dilution.

We measure a company’s leverage against its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT ) covers its interest charge (interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

Yamana Gold has net debt of just 0.26 times EBITDA, indicating that it is certainly not an imprudent borrower. And it has interest coverage of 9.2 times, which is more than enough. In fact, Yamana Gold’s saving grace is its low leverage, as its EBIT has fallen 31% over the past twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when analyzing debt. But it is future earnings, more than anything, that will determine Yamana Gold’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

But our last consideration is also important, because a company cannot pay off its debts with paper profits; he needs cash. It is therefore worth checking how much of this EBIT is supported by free cash flow. Over the past three years, Yamana Gold has recorded free cash flow of 67% of its EBIT, which is about normal, given that free cash flow excludes interest and taxes. This free cash flow puts the company in a good position to repay its debt, should it arise.

Our point of view

Yamana Gold’s EBIT growth rate was a real negative in this analysis, although the other factors we considered cast it in a significantly better light. In particular, its net debt to EBITDA ratio was invigorating. We think Yamana Gold’s debt makes it a bit risky, after looking at the aforementioned data points together. Not all risk is bad, as it can increase stock price returns if it pays off, but this leverage risk is worth keeping in mind. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. For example, we have identified 3 warning signs for Yamana Gold of which you should be aware.

If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-flowing growth stocks without further ado.

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.

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