OceanaGold (TSE:OGC) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies OceanaGold Corporation (TSE:OGC) makes use of debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for OceanaGold

What Is OceanaGold's Net Debt?

You can click the graphic below for the historical numbers, but it shows that OceanaGold had US$86.8m of debt in September 2024, down from US$139.1m, one year before. But on the other hand it also has US$158.6m in cash, leading to a US$71.8m net cash position.

How Healthy Is OceanaGold's Balance Sheet?

According to the last reported balance sheet, OceanaGold had liabilities of US$323.9m due within 12 months, and liabilities of US$346.3m due beyond 12 months. Offsetting this, it had US$158.6m in cash and US$15.5m in receivables that were due within 12 months. So it has liabilities totalling US$496.1m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since OceanaGold has a market capitalization of US$1.95b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, OceanaGold boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for OceanaGold if management cannot prevent a repeat of the 21% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. OceanaGold may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, OceanaGold produced sturdy free cash flow equating to 54% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

Although OceanaGold's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$71.8m. So we don't have any problem with OceanaGold's use of debt. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for OceanaGold you should know about.

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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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.