Is Wesdome Gold Mines (TSE:WDO) 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 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 note that Wesdome Gold Mines Ltd. (TSE:WDO) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Wesdome Gold Mines

How Much Debt Does Wesdome Gold Mines Carry?

The image below, which you can click on for greater detail, shows that Wesdome Gold Mines had debt of CA$28.8m at the end of March 2024, a reduction from CA$46.7m over a year. However, it does have CA$48.3m in cash offsetting this, leading to net cash of CA$19.4m.

How Strong Is Wesdome Gold Mines' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Wesdome Gold Mines had liabilities of CA$86.2m due within 12 months and liabilities of CA$108.3m due beyond that. Offsetting these obligations, it had cash of CA$48.3m as well as receivables valued at CA$4.46m due within 12 months. So it has liabilities totalling CA$141.8m more than its cash and near-term receivables, combined.

Since publicly traded Wesdome Gold Mines shares are worth a total of CA$1.63b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Wesdome Gold Mines also has more cash than debt, so we're pretty confident it can manage its debt safely.

Wesdome Gold Mines grew its EBIT by 4.3% in the last year. That's far from incredible but it is a good thing, when it comes to paying off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Wesdome Gold Mines can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Wesdome Gold Mines has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Wesdome Gold Mines burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Wesdome Gold Mines has CA$19.4m in net cash. On top of that, it increased its EBIT by 4.3% in the last twelve months. So although we see some areas for improvement, we're not too worried about Wesdome Gold Mines's balance sheet. In light of our reservations about the company's balance sheet, it seems sensible to check if insiders have been selling shares recently.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.