We Think Baru Gold (CVE:BARU) Has A Fair Chunk Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Baru Gold Corporation (CVE:BARU) makes use of debt. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Baru Gold

What Is Baru Gold's Debt?

As you can see below, at the end of February 2023, Baru Gold had CA$2.07m of debt, up from none a year ago. Click the image for more detail. However, it also had CA$49.8k in cash, and so its net debt is CA$2.02m.

How Strong Is Baru Gold's Balance Sheet?

According to the last reported balance sheet, Baru Gold had liabilities of CA$3.98m due within 12 months, and liabilities of CA$1.18m due beyond 12 months. Offsetting these obligations, it had cash of CA$49.8k as well as receivables valued at CA$69.3k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$5.04m.

This deficit is considerable relative to its market capitalization of CA$6.57m, so it does suggest shareholders should keep an eye on Baru Gold's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But it is Baru 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 Baru Gold finds some valuable resources, before it runs out of money.

Caveat Emptor

Over the last twelve months Baru Gold produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable CA$2.1m 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. However, it doesn't help that it burned through CA$2.8m of cash over the last year. 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. Be aware that Baru Gold is showing 6 warning signs in our investment analysis , and 5 of those are concerning...

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.