Does Theta Gold Mines (ASX:TGM) Have A Healthy Balance Sheet?

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.' 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 Theta Gold Mines Limited (ASX:TGM) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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, 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.

See our latest analysis for Theta Gold Mines

What Is Theta Gold Mines's Net Debt?

As you can see below, Theta Gold Mines had US$12.0m of debt, at December 2022, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has US$573.0k in cash leading to net debt of about US$11.4m.

How Strong Is Theta Gold Mines' Balance Sheet?

The latest balance sheet data shows that Theta Gold Mines had liabilities of US$9.53m due within a year, and liabilities of US$5.66m falling due after that. Offsetting this, it had US$573.0k in cash and US$196.0k in receivables that were due within 12 months. So its liabilities total US$14.4m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of US$19.9m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Theta Gold Mines will need earnings to service that debt. 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 Theta Gold Mines finds some valuable resources, before it runs out of money.

Caveat Emptor

Over the last twelve months Theta Gold Mines produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable US$4.8m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$5.8m of cash over the last year. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 5 warning signs for Theta Gold Mines you should be aware of, and 3 of them are a bit unpleasant.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.