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.' 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. As with many other companies NovaGold Resources Inc. (TSE:NG) makes use of debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does NovaGold Resources Carry?
You can click the graphic below for the historical numbers, but it shows that as of May 2022 NovaGold Resources had US$118.9m of debt, an increase on US$112.7m, over one year. However, it does have US$142.3m in cash offsetting this, leading to net cash of US$23.4m.
How Healthy Is NovaGold Resources' Balance Sheet?
The latest balance sheet data shows that NovaGold Resources had liabilities of US$2.76m due within a year, and liabilities of US$120.1m falling due after that. Offsetting this, it had US$142.3m in cash and US$406.0k in receivables that were due within 12 months. So it can boast US$19.8m more liquid assets than total liabilities.
Having regard to NovaGold Resources' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$1.66b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that NovaGold Resources has more cash than debt is arguably a good indication that it can manage its debt safely. 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 NovaGold Resources 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.
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 the fact is that over the last twelve months NovaGold Resources lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$12m of cash and made a loss of US$47m. But the saving grace is the US$23.4m on the balance sheet. That means it could keep spending at its current rate for more than two years. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. Case in point: We've spotted 2 warning signs for NovaGold Resources you should be aware of, and 1 of them is a bit concerning.
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.
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