David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Dacian Gold Limited (ASX:DCN) does carry debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.
What Is Dacian Gold's Debt?
As you can see below, Dacian Gold had AU$24.6m of debt at December 2020, down from AU$95.8m a year prior. But on the other hand it also has AU$28.2m in cash, leading to a AU$3.62m net cash position.
How Strong Is Dacian Gold's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Dacian Gold had liabilities of AU$48.1m due within 12 months and liabilities of AU$31.6m due beyond that. On the other hand, it had cash of AU$28.2m and AU$4.09m worth of receivables due within a year. So it has liabilities totalling AU$47.4m more than its cash and near-term receivables, combined.
Given Dacian Gold has a market capitalization of AU$259.5m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Dacian 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 ultimately the future profitability of the business will decide if Dacian Gold can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Dacian Gold made a loss at the EBIT level, and saw its revenue drop to AU$262m, which is a fall of 4.7%. We would much prefer see growth.
So How Risky Is Dacian Gold?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Dacian Gold had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of AU$8.7m and booked a AU$24m accounting loss. But the saving grace is the AU$3.62m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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 Dacian Gold (1 can't be ignored) you should be aware of.
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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