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Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ 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 Go Metals Corp. (CNSX:GOCO) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.
What Is Go Metals’s Net Debt?
The chart below, which you can click on for greater detail, shows that Go Metals had CA$35.1k in debt in April 2019; about the same as the year before. However, its balance sheet shows it holds CA$784.9k in cash, so it actually has CA$749.8k net cash.
How Healthy Is Go Metals’s Balance Sheet?
According to the balance sheet data, Go Metals had liabilities of CA$83.7k due within 12 months, but no longer term liabilities. Offsetting this, it had CA$784.9k in cash and CA$12.9k in receivables that were due within 12 months. So it actually has CA$714.1k more liquid assets than total liabilities.
This short term liquidity is a sign that Go Metals could probably pay off its debt with ease, as its balance sheet is far from stretched. Go Metals boasts net cash, so it’s fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can’t view debt in total isolation; since Go Metals 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 Go Metals finds some valuable resources, before it runs out of money.
So How Risky Is Go Metals?
By their very nature companies that are losing money are more risky than those with a long history of profitability. Anf the fact is that over the last twelve months Go Metals lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CA$969k of cash and made a loss of CA$743k. With only CA$785k on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn’t produce free cash flow regularly. For riskier companies like Go Metals I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
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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If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.