Is Seabridge Gold (TSE:SEA) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Seabridge Gold Inc. (TSE:SEA) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Seabridge Gold

What Is Seabridge Gold's Debt?

As you can see below, at the end of March 2022, Seabridge Gold had CA$281.2m of debt, up from none a year ago. Click the image for more detail. But it also has CA$299.4m in cash to offset that, meaning it has CA$18.2m net cash.

How Healthy Is Seabridge Gold's Balance Sheet?

According to the last reported balance sheet, Seabridge Gold had liabilities of CA$14.2m due within 12 months, and liabilities of CA$307.5m due beyond 12 months. On the other hand, it had cash of CA$299.4m and CA$1.34m worth of receivables due within a year. So it has liabilities totalling CA$20.9m more than its cash and near-term receivables, combined.

This state of affairs indicates that Seabridge Gold's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CA$1.35b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Seabridge Gold 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 it is future earnings, more than anything, that will determine Seabridge Gold'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.

Since Seabridge Gold has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.

So How Risky Is Seabridge Gold?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Seabridge Gold had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CA$93m of cash and made a loss of CA$1.1m. With only CA$18.2m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 4 warning signs for Seabridge Gold (1 shouldn't be ignored!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.