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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We note that NovaGold Resources Inc. (TSE:NG) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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

What Is NovaGold Resources's Net Debt?

As you can see below, at the end of May 2023, NovaGold Resources had US$129.8m of debt, up from US$118.9m a year ago. Click the image for more detail. However, because it has a cash reserve of US$109.0m, its net debt is less, at about US$20.9m.

A Look At NovaGold Resources' Liabilities

The latest balance sheet data shows that NovaGold Resources had liabilities of US$3.32m due within a year, and liabilities of US$130.7m falling due after that. On the other hand, it had cash of US$109.0m and US$25.6m worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

Having regard to NovaGold Resources' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$1.45b company is short on cash, but still worth keeping an eye on the balance sheet. But either way, NovaGold Resources has virtually no net debt, 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 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.

Since NovaGold Resources has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.

Caveat Emptor

Importantly, NovaGold Resources had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$21m at the EBIT level. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. This one is a bit too risky for our liking. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 4 warning signs we've spotted with NovaGold Resources (including 2 which make us uncomfortable) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.