Is Dacian Gold (ASX:DCN) Weighed On By Its Debt Load?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Dacian Gold Limited (ASX:DCN) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Dacian Gold

How Much Debt Does Dacian Gold Carry?

You can click the graphic below for the historical numbers, but it shows that Dacian Gold had AU$17.4m of debt in December 2021, down from AU$24.6m, one year before. However, its balance sheet shows it holds AU$26.9m in cash, so it actually has AU$9.56m net cash.

How Strong Is Dacian Gold's Balance Sheet?

The latest balance sheet data shows that Dacian Gold had liabilities of AU$51.0m due within a year, and liabilities of AU$36.9m falling due after that. On the other hand, it had cash of AU$26.9m and AU$4.41m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$56.5m.

Given Dacian Gold has a market capitalization of AU$287.5m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Dacian Gold also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 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$186m, which is a fall of 29%. That makes us nervous, to say the least.

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 the fact is that over the last twelve months Dacian Gold lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through AU$50m of cash and made a loss of AU$64m. While this does make the company a bit risky, it's important to remember it has net cash of AU$9.56m. 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. 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. Be aware that Dacian Gold is showing 3 warning signs in our investment analysis , and 1 of those is potentially serious...

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.

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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.