Would Theta Gold Mines (ASX:TGM) Be Better Off With Less 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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Theta Gold Mines Limited (ASX:TGM) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Theta Gold Mines

How Much Debt Does Theta Gold Mines Carry?

You can click the graphic below for the historical numbers, but it shows that Theta Gold Mines had US$14.6m of debt in December 2024, down from US$17.5m, one year before. On the flip side, it has US$1.43m in cash leading to net debt of about US$13.2m.

How Healthy Is Theta Gold Mines' Balance Sheet?

The latest balance sheet data shows that Theta Gold Mines had liabilities of US$15.7m due within a year, and liabilities of US$2.08m falling due after that. Offsetting this, it had US$1.43m in cash and US$75.0k in receivables that were due within 12 months. So its liabilities total US$16.3m more than the combination of its cash and short-term receivables.

Theta Gold Mines has a market capitalization of US$70.8m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Theta Gold Mines will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

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. Its EBIT loss was a whopping US$11m. 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$10m of cash over the last year. So suffice it to say we consider the stock very 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 5 warning signs for Theta Gold Mines (of which 3 make us uncomfortable!) you should know about.

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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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.