Superior Gold (CVE:SGI) Has Debt But No Earnings; Should You Worry?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about. When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Superior Gold Inc. (CVE:SGI) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Superior Gold

What Is Superior Gold's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2020 Superior Gold had US$2.05m of debt, an increase on US$388.0k, over one year. However, its balance sheet shows it holds US$16.3m in cash, so it actually has US$14.2m net cash.

How Strong Is Superior Gold's Balance Sheet?

According to the last reported balance sheet, Superior Gold had liabilities of US$30.2m due within 12 months, and liabilities of US$31.5m due beyond 12 months. Offsetting these obligations, it had cash of US$16.3m as well as receivables valued at US$2.01m due within 12 months. So its liabilities total US$43.4m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Superior Gold has a market capitalization of US$76.4m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Superior Gold boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Superior Gold'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.

In the last year Superior Gold had negative earnings before interest and tax, and actually shrunk its revenue by 4.7%, to US$113m. That's not what we would hope to see.

So How Risky Is Superior Gold?

Although Superior Gold had negative earnings before interest and tax (EBIT) over the last twelve months, it generated positive free cash flow of US$6.6m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Superior Gold that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. 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.
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