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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. We note that AuStar Gold Limited (ASX:AUL) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for AuStar Gold
How Much Debt Does AuStar Gold Carry?
The image below, which you can click on for greater detail, shows that AuStar Gold had debt of AU$7.1k at the end of December 2018, a reduction from AU$739.4k over a year. However, its balance sheet shows it holds AU$2.60m in cash, so it actually has AU$2.59m net cash.
A Look At AuStar Gold’s Liabilities
According to the balance sheet data, AuStar Gold had liabilities of AU$670.4k due within 12 months, but no longer term liabilities. Offsetting this, it had AU$2.60m in cash and AU$204.2k in receivables that were due within 12 months. So it actually has AU$2.13m more liquid assets than total liabilities.
This surplus suggests that AuStar Gold is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. AuStar Gold boasts net cash, so it’s fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can’t view debt in total isolation; since AuStar Gold will need earnings to service that debt. So if you’re keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Since AuStar Gold has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.
So How Risky Is AuStar Gold?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that AuStar Gold had negative earnings before interest and tax (EBIT), over the last year. And over the same period it saw negative free cash outflow of AU$4.9m and booked a AU$1.6m accounting loss. With only AU$2.6m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn’t produce free cash flow regularly. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting AuStar Gold insider transactions.
If, after all that, you’re more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.