Does NovaGold Resources (TSE:NG) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that NovaGold Resources Inc. (TSE:NG) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for NovaGold Resources

How Much Debt Does NovaGold Resources Carry?

As you can see below, at the end of August 2021, NovaGold Resources had US$114.2m of debt, up from US$108.4m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$173.3m in cash, so it actually has US$59.1m net cash.

How Strong Is NovaGold Resources' Balance Sheet?

The latest balance sheet data shows that NovaGold Resources had liabilities of US$2.80m due within a year, and liabilities of US$114.5m falling due after that. Offsetting these obligations, it had cash of US$173.3m as well as receivables valued at US$45.0k due within 12 months. So it can boast US$56.1m more liquid assets than total liabilities.

This surplus suggests that NovaGold Resources has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that NovaGold Resources has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if NovaGold Resources can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Given its lack of meaningful operating revenue, investors are probably hoping that NovaGold Resources finds some valuable resources, before it runs out of money.

So How Risky Is NovaGold Resources?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year NovaGold Resources had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$11m of cash and made a loss of US$37m. But the saving grace is the US$59.1m on the balance sheet. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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 2 warning signs with NovaGold Resources (at least 1 which is a bit concerning) , 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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.