Is Equinox Gold (TSE:EQX) Using Too Much 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Equinox Gold Corp. (TSE:EQX) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Equinox Gold

What Is Equinox Gold's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 Equinox Gold had US$832.7m of debt, an increase on US$536.2m, over one year. However, it also had US$418.8m in cash, and so its net debt is US$413.9m.

How Healthy Is Equinox Gold's Balance Sheet?

We can see from the most recent balance sheet that Equinox Gold had liabilities of US$260.7m falling due within a year, and liabilities of US$1.38b due beyond that. Offsetting these obligations, it had cash of US$418.8m as well as receivables valued at US$78.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$1.15b.

This deficit is considerable relative to its market capitalization of US$1.54b, so it does suggest shareholders should keep an eye on Equinox Gold's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe 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 Equinox Gold's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Equinox Gold made a loss at the EBIT level, and saw its revenue drop to US$963m, which is a fall of 10%. That's not what we would hope to see.

Caveat Emptor

Not only did Equinox Gold's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at US$1.0m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any 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 US$345m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. We've identified 1 warning sign with Equinox Gold , 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.