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. We note that GoldMining Inc. (TSE:GOLD) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
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. 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 GoldMining
How Much Debt Does GoldMining Carry?
The image below, which you can click on for greater detail, shows that at May 2022 GoldMining had debt of CA$12.7m, up from CA$215.0k in one year. However, it also had CA$8.77m in cash, and so its net debt is CA$3.90m.
How Healthy Is GoldMining's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that GoldMining had liabilities of CA$13.9m due within 12 months and liabilities of CA$2.18m due beyond that. Offsetting these obligations, it had cash of CA$8.77m as well as receivables valued at CA$23.7k due within 12 months. So it has liabilities totalling CA$7.31m more than its cash and near-term receivables, combined.
Of course, GoldMining has a market capitalization of CA$199.0m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if GoldMining 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.
Since GoldMining has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.
Caveat Emptor
Over the last twelve months GoldMining produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CA$12m. 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CA$9.0m in negative free cash flow over the last twelve months. So to be blunt we think it is 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. Case in point: We've spotted 2 warning signs for GoldMining you should be aware of, and 1 of them is a bit concerning.
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.
About TSX:GOLD
GoldMining
A mineral exploration company, focuses on the acquisition, exploration, and development of gold assets in the Americas.
Moderate with adequate balance sheet.
