Here's Why Arizona Gold (TSE:AZG) Can Afford Some Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, Arizona Gold Corp. (TSE:AZG) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Arizona Gold

What Is Arizona Gold's Debt?

As you can see below, Arizona Gold had CA$12.0m of debt at March 2021, down from CA$14.4m a year prior. On the flip side, it has CA$9.48m in cash leading to net debt of about CA$2.48m.

How Healthy Is Arizona Gold's Balance Sheet?

The latest balance sheet data shows that Arizona Gold had liabilities of CA$1.11m due within a year, and liabilities of CA$29.8m falling due after that. On the other hand, it had cash of CA$9.48m and CA$82.4k worth of receivables due within a year. So its liabilities total CA$21.3m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Arizona Gold has a market capitalization of CA$36.3m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Arizona Gold will need earnings to service that debt. 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 Arizona Gold finds some valuable resources, before it runs out of money.

Caveat Emptor

Importantly, Arizona Gold had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CA$6.5m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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$9.8m in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 5 warning signs with Arizona Gold (at least 3 which can't be ignored) , 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.
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