Is Dacian Gold (ASX:DCN) Using Too Much Debt?

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.' 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 the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Dacian Gold

What Is Dacian Gold's Net Debt?

As you can see below, Dacian Gold had AU$23.4m of debt at December 2020, down from AU$95.8m a year prior. However, it does have AU$28.2m in cash offsetting this, leading to net cash of AU$4.81m.

A Look At Dacian Gold's Liabilities

The latest balance sheet data shows that Dacian Gold had liabilities of AU$48.1m due within a year, and liabilities of AU$31.6m falling due after that. Offsetting these obligations, it had cash of AU$28.2m as well as receivables valued at AU$4.09m due within 12 months. So its liabilities total AU$47.4m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Dacian Gold has a market capitalization of AU$205.9m, 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, Dacian Gold boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Dacian 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.

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%. That's not what we would hope to see.

So How Risky Is Dacian Gold?

We have no doubt that loss making companies are, in general, riskier than profitable ones. 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. While this does make the company a bit risky, it's important to remember it has net cash of AU$4.81m. That means it could keep spending at its current rate for more than two years. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Dacian Gold has 2 warning signs (and 1 which is significant) we think you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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