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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 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 California Gold Mining Inc. (CNSX:CGM) does use debt in its business. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. 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. 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. The first step when considering a company’s debt levels is to consider its cash and debt together.
How Much Debt Does California Gold Mining Carry?
You can click the graphic below for the historical numbers, but it shows that as of February 2019 California Gold Mining had CA$175.0k of debt, an increase on none, over one year. However, because it has a cash reserve of CA$26.5k, its net debt is less, at about CA$148.5k.
How Healthy Is California Gold Mining’s Balance Sheet?
According to the balance sheet data, California Gold Mining had liabilities of CA$578.8k due within 12 months, but no longer term liabilities. On the other hand, it had cash of CA$26.5k and CA$22.5k worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$529.8k.
Having regard to California Gold Mining’s size, it seems that its liquid assets are well balanced with its total liabilities. So while it’s hard to imagine that the CA$40.5m company is struggling for cash, we still think it’s worth monitoring its balance sheet. But either way, California Gold Mining has virtually no net debt, so it’s fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is California Gold Mining’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 California Gold Mining finds some valuable resources, before it runs out of money.
Importantly, California Gold Mining had negative earnings before interest and tax (EBIT), over the last year. Indeed, it lost CA$2.4m 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. Another cause for caution is that is bled CA$3.1m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. For riskier companies like California Gold Mining I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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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