Is Signal Gold (TSE:SGNL) Using Debt Sensibly?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We can see that Signal Gold Inc. (TSE:SGNL) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Signal Gold

What Is Signal Gold's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Signal Gold had CA$10.3m of debt, an increase on CA$1.45m, over one year. But it also has CA$10.9m in cash to offset that, meaning it has CA$684.8k net cash.

How Strong Is Signal Gold's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Signal Gold had liabilities of CA$20.0m due within 12 months and liabilities of CA$8.68m due beyond that. On the other hand, it had cash of CA$10.9m and CA$451.2k worth of receivables due within a year. So its liabilities total CA$17.3m more than the combination of its cash and short-term receivables.

Of course, Signal Gold has a market capitalization of CA$90.1m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Signal 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 Signal Gold's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Signal Gold had a loss before interest and tax, and actually shrunk its revenue by 16%, to CA$31m. That's not what we would hope to see.

So How Risky Is Signal Gold?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Signal Gold had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CA$19m and booked a CA$6.3m accounting loss. With only CA$684.8k 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. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Signal Gold .

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. 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.