The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. Importantly, B2Gold Corp. (TSE:BTO) does carry debt. But the more important question is: how much risk is that debt creating?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
What Is B2Gold's Net Debt?
The image below, which you can click on for greater detail, shows that B2Gold had debt of US$40.9m at the end of September 2020, a reduction from US$356.0m over a year. However, its balance sheet shows it holds US$365.5m in cash, so it actually has US$324.6m net cash.
A Look At B2Gold's Liabilities
Zooming in on the latest balance sheet data, we can see that B2Gold had liabilities of US$294.5m due within 12 months and liabilities of US$354.7m due beyond that. On the other hand, it had cash of US$365.5m and US$32.3m worth of receivables due within a year. So it has liabilities totalling US$251.4m more than its cash and near-term receivables, combined.
Of course, B2Gold has a market capitalization of US$6.31b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, B2Gold also has more cash than debt, so we're pretty confident it can manage its debt safely.
Even more impressive was the fact that B2Gold grew its EBIT by 231% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if B2Gold can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While B2Gold 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. Over the most recent three years, B2Gold recorded free cash flow worth 64% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.
We could understand if investors are concerned about B2Gold's liabilities, but we can be reassured by the fact it has has net cash of US$324.6m. And we liked the look of last year's 231% year-on-year EBIT growth. So is B2Gold's debt a risk? It doesn't seem so to us. 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. Take risks, for example - B2Gold has 4 warning signs (and 1 which is significant) we think you should know about.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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. 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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