Westgold Resources (ASX:WGX) Seems To Use Debt Quite Sensibly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We can see that Westgold Resources Limited (ASX:WGX) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Westgold Resources

What Is Westgold Resources's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 Westgold Resources had AU$50.0m of debt, an increase on none, over one year. But on the other hand it also has AU$124.7m in cash, leading to a AU$74.7m net cash position.

How Healthy Is Westgold Resources' Balance Sheet?

We can see from the most recent balance sheet that Westgold Resources had liabilities of AU$355.2m falling due within a year, and liabilities of AU$685.6m due beyond that. Offsetting this, it had AU$124.7m in cash and AU$21.4m in receivables that were due within 12 months. So its liabilities total AU$894.7m more than the combination of its cash and short-term receivables.

Westgold Resources has a market capitalization of AU$2.49b, 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. While it does have liabilities worth noting, Westgold Resources also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Westgold Resources has boosted its EBIT by 87%, thus reducing the spectre of future debt repayments. 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 Westgold Resources'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Westgold Resources has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last two years, Westgold Resources's free cash flow amounted to 36% 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$74.7m. And it impressed us with its EBIT growth of 87% over the last year. So we don't have any problem with Westgold Resources's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Westgold Resources (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

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.