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

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.' 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 should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider 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 November 2022 NovaGold Resources had debt of US$123.7m, up from US$115.7m in one year. But on the other hand it also has US$125.9m in cash, leading to a US$2.20m net cash position.

How Healthy Is NovaGold Resources' Balance Sheet?

We can see from the most recent balance sheet that NovaGold Resources had liabilities of US$4.60m falling due within a year, and liabilities of US$124.7m due beyond that. Offsetting these obligations, it had cash of US$125.9m as well as receivables valued at US$25.4m due within 12 months. So it actually has US$22.0m 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$1.95b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, NovaGold Resources boasts net cash, so it's fair to say it does not have a heavy debt load! 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?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year NovaGold Resources had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$12m and booked a US$53m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$2.20m. 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. For instance, we've identified 3 warning signs for NovaGold Resources (1 is potentially serious) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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

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.