Austral Gold (ASX:AGD) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Austral Gold Limited (ASX:AGD) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Austral Gold

How Much Debt Does Austral Gold Carry?

As you can see below, at the end of December 2022, Austral Gold had US$8.65m of debt, up from US$5.75m a year ago. Click the image for more detail. However, it does have US$1.57m in cash offsetting this, leading to net debt of about US$7.08m.

How Strong Is Austral Gold's Balance Sheet?

We can see from the most recent balance sheet that Austral Gold had liabilities of US$29.8m falling due within a year, and liabilities of US$18.7m due beyond that. Offsetting these obligations, it had cash of US$1.57m as well as receivables valued at US$2.42m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$44.5m.

This deficit casts a shadow over the US$14.9m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Austral Gold would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is Austral Gold's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Austral Gold made a loss at the EBIT level, and saw its revenue drop to US$50m, which is a fall of 23%. To be frank that doesn't bode well.

Caveat Emptor

While Austral Gold's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable US$9.1m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through US$1.2m in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. 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 example, we've discovered 1 warning sign for Austral Gold that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.