Does Golden Cross Resources (ASX:GCR) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies Golden Cross Resources Limited (ASX:GCR) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Golden Cross Resources

What Is Golden Cross Resources's Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Golden Cross Resources had debt of AU$7.97m, up from AU$7.00m in one year. Net debt is about the same, since the it doesn't have much cash.

A Look At Golden Cross Resources' Liabilities

The latest balance sheet data shows that Golden Cross Resources had liabilities of AU$2.54m due within a year, and liabilities of AU$5.85m falling due after that. Offsetting this, it had AU$18.0k in cash and AU$20.0k in receivables that were due within 12 months. So its liabilities total AU$8.36m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the AU$4.39m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Golden Cross Resources would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is Golden Cross Resources'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.

Given its lack of meaningful operating revenue, investors are probably hoping that Golden Cross Resources finds some valuable resources, before it runs out of money.

Caveat Emptor

Importantly, Golden Cross Resources had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable AU$644k at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through AU$482k in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Golden Cross Resources you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.