Does Lundin Gold (TSE:LUG) Have A Healthy Balance Sheet?

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 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 note that Lundin Gold Inc. (TSE:LUG) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Lundin Gold

What Is Lundin Gold's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Lundin Gold had US$150.0m of debt in June 2024, down from US$396.6m, one year before. However, it does have US$237.7m in cash offsetting this, leading to net cash of US$87.7m.

How Healthy Is Lundin Gold's Balance Sheet?

We can see from the most recent balance sheet that Lundin Gold had liabilities of US$260.2m falling due within a year, and liabilities of US$86.0m due beyond that. Offsetting these obligations, it had cash of US$237.7m as well as receivables valued at US$160.5m due within 12 months. So it can boast US$52.0m more liquid assets than total liabilities.

Having regard to Lundin 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$5.31b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Lundin Gold boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Lundin Gold grew its EBIT by 4.1% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Lundin 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Lundin Gold has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Lundin Gold actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Lundin Gold has net cash of US$87.7m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$410m, being 109% of its EBIT. So is Lundin Gold's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Lundin Gold , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.