Is Premier Gold Mines (TSE:PG) Using Debt Sensibly?

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 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. We note that Premier Gold Mines Limited (TSE:PG) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Premier Gold Mines

What Is Premier Gold Mines's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Premier Gold Mines had debt of US$37.9m, up from US$27.2m in one year. But on the other hand it also has US$52.0m in cash, leading to a US$14.1m net cash position.

How Strong Is Premier Gold Mines's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Premier Gold Mines had liabilities of US$52.8m due within 12 months and liabilities of US$58.1m due beyond that. On the other hand, it had cash of US$52.0m and US$9.77m worth of receivables due within a year. So its liabilities total US$49.1m more than the combination of its cash and short-term receivables.

Since publicly traded Premier Gold Mines shares are worth a total of US$465.2m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Premier Gold Mines boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Premier Gold Mines'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.

In the last year Premier Gold Mines wasn't profitable at an EBIT level, but managed to grow its revenue by 14%, to US$97m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Premier Gold Mines?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Premier Gold Mines lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$36m and booked a US$29m accounting loss. But at least it has US$14.1m on the balance sheet to spend on growth, near-term. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. Case in point: We've spotted 1 warning sign for Premier Gold Mines you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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. 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.
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