Would Seabridge Gold (TSE:SEA) Be Better Off With Less Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Seabridge Gold Inc. (TSE:SEA) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Seabridge Gold

What Is Seabridge Gold's Net Debt?

As you can see below, Seabridge Gold had CA$282.3m of debt, at March 2023, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has CA$42.7m in cash leading to net debt of about CA$239.6m.

A Look At Seabridge Gold's Liabilities

According to the last reported balance sheet, Seabridge Gold had liabilities of CA$54.6m due within 12 months, and liabilities of CA$316.1m due beyond 12 months. Offsetting these obligations, it had cash of CA$42.7m as well as receivables valued at CA$3.61m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$324.4m.

This deficit isn't so bad because Seabridge Gold is worth CA$1.46b, 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is Seabridge Gold's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Given its lack of meaningful operating revenue, investors are probably hoping that Seabridge Gold finds some valuable resources, before it runs out of money.

Caveat Emptor

Over the last twelve months Seabridge Gold produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CA$22m. 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 CA$222m 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Seabridge Gold has 4 warning signs (and 2 which make us uncomfortable) we think 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.