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David Iben put it well when he said, ‘Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.’ It’s only natural to consider a company’s balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Kirkland Lake Gold Ltd. (TSE:KL) does use debt in its business. But the real question is whether this debt is making the company risky.
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. 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, 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. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Kirkland Lake Gold’s Debt?
As you can see below, Kirkland Lake Gold had US$22.2m of debt at March 2019, down from US$39.1m a year prior. However, it does have US$416.1m in cash offsetting this, leading to net cash of US$393.9m.
How Strong Is Kirkland Lake Gold’s Balance Sheet?
We can see from the most recent balance sheet that Kirkland Lake Gold had liabilities of US$233.7m falling due within a year, and liabilities of US$268.0m due beyond that. Offsetting these obligations, it had cash of US$416.1m as well as receivables valued at US$18.2m due within 12 months. So it has liabilities totalling US$67.4m more than its cash and near-term receivables, combined.
Having regard to Kirkland Lake Gold’s size, it seems that its liquid assets are well balanced with its total liabilities. So while it’s hard to imagine that the US$8.81b company is struggling for cash, we still think it’s worth monitoring its balance sheet. Kirkland Lake Gold boasts net cash, so it’s fair to say it does not have a heavy debt load!
In addition to that, we’re happy to report that Kirkland Lake Gold has boosted its EBIT by 98%, thus reducing the spectre of future debt repayments. 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 Kirkland Lake 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, a company can only pay off debt with cold hard cash, not accounting profits. Kirkland Lake 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 most recent three years, Kirkland Lake Gold recorded free cash flow worth 70% 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.
We could understand if investors are concerned about Kirkland Lake Gold’s liabilities, but we can be reassured by the fact it has has net cash of US$394m. And it impressed us with its EBIT growth of 98% over the last year. So we don’t think Kirkland Lake Gold’s use of debt is risky. We’d be very excited to see if Kirkland Lake Gold insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.
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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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.