China Gold International Resources (TSE:CGG) Is Making Moderate Use Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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, China Gold International Resources Corp. Ltd. (TSE:CGG) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for China Gold International Resources

What Is China Gold International Resources's Debt?

The image below, which you can click on for greater detail, shows that at June 2024 China Gold International Resources had debt of US$795.8m, up from US$722.0m in one year. However, because it has a cash reserve of US$171.6m, its net debt is less, at about US$624.2m.

How Healthy Is China Gold International Resources' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that China Gold International Resources had liabilities of US$358.4m due within 12 months and liabilities of US$831.6m due beyond that. On the other hand, it had cash of US$171.6m and US$12.9m worth of receivables due within a year. So its liabilities total US$1.01b more than the combination of its cash and short-term receivables.

China Gold International Resources has a market capitalization of US$1.81b, so it could very likely raise cash to ameliorate 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine China Gold International Resources's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year China Gold International Resources had a loss before interest and tax, and actually shrunk its revenue by 59%, to US$342m. To be frank that doesn't bode well.

Caveat Emptor

While China Gold International Resources's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at US$49m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$37m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting China Gold International Resources insider transactions.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.