What Does New Gold Inc.'s (TSE:NGD) Balance Sheet Tell Us About It?

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While small-cap stocks, such as New Gold Inc. (TSE:NGD) with its market cap of CA$660m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that NGD is not presently profitable, it’s vital to assess the current state of its operations and pathway to profitability. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, this is just a partial view of the stock, and I suggest you dig deeper yourself into NGD here.

Does NGD Produce Much Cash Relative To Its Debt?

NGD's debt levels have fallen from US$1.0b to US$799m over the last 12 months , which includes long-term debt. With this reduction in debt, NGD's cash and short-term investments stands at US$132m , ready to be used for running the business. Additionally, NGD has generated US$254m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 32%, meaning that NGD’s operating cash is sufficient to cover its debt.

Does NGD’s liquid assets cover its short-term commitments?

With current liabilities at US$126m, it seems that the business has been able to meet these commitments with a current assets level of US$297m, leading to a 2.35x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. For Metals and Mining companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Can NGD service its debt comfortably?

With debt reaching 86% of equity, NGD may be thought of as relatively highly levered. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. But since NGD is presently unprofitable, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.

Next Steps:

NGD’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around NGD's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure NGD has company-specific issues impacting its capital structure decisions. You should continue to research New Gold to get a better picture of the small-cap by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for NGD’s future growth? Take a look at our free research report of analyst consensus for NGD’s outlook.
2. Valuation: What is NGD worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether NGD is currently mispriced by the market.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.