Is Goldgroup Mining (TSE:GGA) A Risky Investment?

Warren Buffett famously said, '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 Goldgroup Mining Inc. (TSE:GGA) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Goldgroup Mining

What Is Goldgroup Mining's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 Goldgroup Mining had US$1.53m of debt, an increase on US$676.0k, over one year. But on the other hand it also has US$4.96m in cash, leading to a US$3.43m net cash position.

A Look At Goldgroup Mining's Liabilities

Zooming in on the latest balance sheet data, we can see that Goldgroup Mining had liabilities of US$8.13m due within 12 months and liabilities of US$2.84m due beyond that. On the other hand, it had cash of US$4.96m and US$455.0k worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$5.56m.

This deficit is considerable relative to its market capitalization of US$7.72m, so it does suggest shareholders should keep an eye on Goldgroup Mining's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, Goldgroup Mining boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Goldgroup Mining's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Goldgroup Mining reported revenue of US$26m, which is a gain of 42%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Goldgroup Mining?

While Goldgroup Mining lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of US$833k. So taking that on face value, and considering the cash, we don't think its very risky in the near term. One positive is that Goldgroup Mining is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But that doesn't change our opinion that the stock 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. To that end, you should learn about the 4 warning signs we've spotted with Goldgroup Mining (including 1 which is a bit concerning) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.

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