We Think Westgold Resources (ASX:WGX) Can Stay On Top Of Its Debt

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 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. Importantly, Westgold Resources Limited (ASX:WGX) does carry debt. But should shareholders be worried about its use of debt?

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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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

How Much Debt Does Westgold Resources Carry?

As you can see below, at the end of March 2025, Westgold Resources had AU$50.0m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds AU$180.5m in cash, so it actually has AU$130.5m net cash.

A Look At Westgold Resources' Liabilities

Zooming in on the latest balance sheet data, we can see that Westgold Resources had liabilities of AU$359.0m due within 12 months and liabilities of AU$696.9m due beyond that. Offsetting these obligations, it had cash of AU$180.5m as well as receivables valued at AU$67.6m due within 12 months. So its liabilities total AU$807.7m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Westgold Resources has a market capitalization of AU$2.58b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Westgold Resources boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Westgold Resources

Even more impressive was the fact that Westgold Resources grew its EBIT by 137% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Westgold Resources can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Westgold Resources may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last two years, Westgold Resources's free cash flow amounted to 47% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While Westgold Resources does have more liabilities than liquid assets, it also has net cash of AU$130.5m. And we liked the look of last year's 137% year-on-year EBIT growth. So we don't think Westgold Resources's use of debt is risky. 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. To that end, you should be aware of the 1 warning sign we've spotted with Westgold Resources .

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.