Does Eldorado Gold (TSE:ELD) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Eldorado Gold Corporation (TSE:ELD) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Eldorado Gold

What Is Eldorado Gold's Debt?

As you can see below, Eldorado Gold had US$491.5m of debt at March 2021, down from US$635.1m a year prior. But on the other hand it also has US$534.0m in cash, leading to a US$42.4m net cash position.

A Look At Eldorado Gold's Liabilities

According to the last reported balance sheet, Eldorado Gold had liabilities of US$244.6m due within 12 months, and liabilities of US$983.2m due beyond 12 months. Offsetting this, it had US$534.0m in cash and US$55.0m in receivables that were due within 12 months. So its liabilities total US$638.8m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Eldorado Gold has a market capitalization of US$2.15b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Eldorado Gold boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Eldorado Gold grew its EBIT by 142% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Eldorado Gold'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Eldorado 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. Over the most recent two years, Eldorado Gold recorded free cash flow worth 71% 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.

Summing up

While Eldorado Gold does have more liabilities than liquid assets, it also has net cash of US$42.4m. And it impressed us with its EBIT growth of 142% over the last year. So we don't think Eldorado Gold's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Eldorado Gold is showing 2 warning signs in our investment analysis , you should know about...

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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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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