Is Eldorado Gold (TSE:ELD) Using Too Much Debt?

Warren Buffett famously said, '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. We can see that Eldorado Gold Corporation (TSE:ELD) does use debt in its business. But the real question is whether this debt is making the company risky.

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Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Eldorado Gold's Debt?

The image below, which you can click on for greater detail, shows that at December 2024 Eldorado Gold had debt of US$915.4m, up from US$636.1m in one year. But it also has US$995.7m in cash to offset that, meaning it has US$80.3m net cash.

A Look At Eldorado Gold's Liabilities

According to the last reported balance sheet, Eldorado Gold had liabilities of US$412.2m due within 12 months, and liabilities of US$1.53b due beyond 12 months. Offsetting these obligations, it had cash of US$995.7m as well as receivables valued at US$109.9m due within 12 months. So it has liabilities totalling US$841.5m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Eldorado Gold has a market capitalization of US$3.96b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Eldorado Gold boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for Eldorado Gold

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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Eldorado Gold 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Eldorado Gold may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Eldorado Gold recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

Although Eldorado 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$80.3m. And it impressed us with its EBIT growth of 142% over the last year. So we don't have any problem with Eldorado Gold's use of debt. 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. For instance, we've identified 1 warning sign for Eldorado Gold that you should be aware of.

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.