Here's Why Barrick Gold (TSE:ABX) Can Manage Its Debt Responsibly

By
Simply Wall St
Published
May 06, 2022
TSX:ABX
Source: Shutterstock

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, Barrick Gold Corporation (TSE:ABX) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Barrick Gold

What Is Barrick Gold's Net Debt?

As you can see below, Barrick Gold had US$5.14b of debt, at March 2022, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$5.89b in cash offsetting this, leading to net cash of US$743.0m.

debt-equity-history-analysis
TSX:ABX Debt to Equity History May 6th 2022

How Strong Is Barrick Gold's Balance Sheet?

The latest balance sheet data shows that Barrick Gold had liabilities of US$2.25b due within a year, and liabilities of US$12.4b falling due after that. On the other hand, it had cash of US$5.89b and US$640.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$8.15b.

This deficit isn't so bad because Barrick Gold is worth a massive US$40.1b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Barrick Gold also has more cash than debt, so we're pretty confident it can manage its debt safely.

In fact Barrick Gold's saving grace is its low debt levels, because its EBIT has tanked 21% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Barrick Gold'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Barrick Gold 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. During the last three years, Barrick Gold produced sturdy free cash flow equating to 53% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

Although Barrick Gold's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$743.0m. So we don't have any problem with Barrick Gold'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. To that end, you should be aware of the 1 warning sign we've spotted with Barrick Gold .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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