Here's Why OceanaGold (TSE:OGC) Can Afford Some Debt

Warren Buffett famously said, '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 note that OceanaGold Corporation (TSE:OGC) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for OceanaGold

How Much Debt Does OceanaGold Carry?

The chart below, which you can click on for greater detail, shows that OceanaGold had US$206.5m in debt in March 2021; about the same as the year before. On the flip side, it has US$145.5m in cash leading to net debt of about US$61.0m.

How Healthy Is OceanaGold's Balance Sheet?

The latest balance sheet data shows that OceanaGold had liabilities of US$237.2m due within a year, and liabilities of US$432.8m falling due after that. Offsetting these obligations, it had cash of US$145.5m as well as receivables valued at US$7.70m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$516.8m.

This deficit isn't so bad because OceanaGold is worth US$1.32b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 OceanaGold 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.

In the last year OceanaGold had a loss before interest and tax, and actually shrunk its revenue by 16%, to US$511m. We would much prefer see growth.

Caveat Emptor

While OceanaGold's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at US$96m. 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$143m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for OceanaGold that you should be aware of before investing here.

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.

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