Is NovaGold Resources (TSE:NG) A Risky Investment?

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.' 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. As with many other companies NovaGold Resources Inc. (TSE:NG) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for NovaGold Resources

What Is NovaGold Resources's Net Debt?

The image below, which you can click on for greater detail, shows that at August 2023 NovaGold Resources had debt of US$133.3m, up from US$121.1m in one year. However, it also had US$130.1m in cash, and so its net debt is US$3.20m.

A Look At NovaGold Resources' Liabilities

According to the last reported balance sheet, NovaGold Resources had liabilities of US$3.96m due within 12 months, and liabilities of US$134.1m due beyond 12 months. On the other hand, it had cash of US$130.1m and US$1.56m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$6.45m.

This state of affairs indicates that NovaGold Resources' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$1.19b company is short on cash, but still worth keeping an eye on the balance sheet. Carrying virtually no net debt, NovaGold Resources has a very light debt load indeed. 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 NovaGold Resources's ability to maintain a healthy balance sheet going forward. 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.

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. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled US$8.5m 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. For instance, we've identified 3 warning signs for NovaGold Resources (1 is significant) you should be aware of.

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.