Is NovaGold Resources (TSE:NG) Using Too Much Debt?

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.' 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 can see that NovaGold Resources Inc. (TSE:NG) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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.

View 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 February 2022 NovaGold Resources had debt of US$117.2m, up from US$111.2m in one year. However, its balance sheet shows it holds US$155.1m in cash, so it actually has US$37.9m net cash.

How Strong Is NovaGold Resources' Balance Sheet?

We can see from the most recent balance sheet that NovaGold Resources had liabilities of US$2.30m falling due within a year, and liabilities of US$117.7m due beyond that. On the other hand, it had cash of US$155.1m and US$351.0k worth of receivables due within a year. So it can boast US$35.5m 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 it's very unlikely that the US$2.11b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, NovaGold Resources boasts net cash, so it's fair to say it does not have a heavy debt load! 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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

So How Risky Is NovaGold Resources?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that NovaGold Resources had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$12m of cash and made a loss of US$43m. While this does make the company a bit risky, it's important to remember it has net cash of US$37.9m. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that NovaGold Resources is showing 2 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.