Would Sabre Gold Mines (TSE:SGLD) Be Better Off With Less 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. As with many other companies Sabre Gold Mines Corp. (TSE:SGLD) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 Sabre Gold Mines

What Is Sabre Gold Mines's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2021 Sabre Gold Mines had debt of CA$13.7m, up from CA$11.6m in one year. However, it does have CA$11.2m in cash offsetting this, leading to net debt of about CA$2.44m.

A Look At Sabre Gold Mines' Liabilities

Zooming in on the latest balance sheet data, we can see that Sabre Gold Mines had liabilities of CA$5.09m due within 12 months and liabilities of CA$32.6m due beyond that. On the other hand, it had cash of CA$11.2m and CA$290.2k worth of receivables due within a year. So its liabilities total CA$26.1m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of CA$34.8m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Sabre Gold Mines will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

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

Caveat Emptor

Importantly, Sabre Gold Mines had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CA$4.8m at the EBIT level. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CA$8.5m 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. To that end, you should learn about the 5 warning signs we've spotted with Sabre Gold Mines (including 3 which are a bit unpleasant) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.