Stock Analysis

Is Elevation Gold Mining (CVE:ELVT) Using Too Much Debt?

TSXV:ELVT
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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. As with many other companies Elevation Gold Mining Corporation (CVE:ELVT) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Elevation Gold Mining

What Is Elevation Gold Mining's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Elevation Gold Mining had US$6.06m of debt in June 2021, down from US$16.6m, one year before. But it also has US$6.89m in cash to offset that, meaning it has US$833.0k net cash.

debt-equity-history-analysis
TSXV:ELVT Debt to Equity History November 3rd 2021

How Strong Is Elevation Gold Mining's Balance Sheet?

The latest balance sheet data shows that Elevation Gold Mining had liabilities of US$22.5m due within a year, and liabilities of US$38.0m falling due after that. Offsetting this, it had US$6.89m in cash and US$337.0k in receivables that were due within 12 months. So its liabilities total US$53.2m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of US$54.9m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Elevation Gold Mining boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Elevation Gold Mining grew its EBIT by 401% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Elevation Gold Mining's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Elevation Gold Mining may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last two years, Elevation Gold Mining created free cash flow amounting to 2.8% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While Elevation Gold Mining does have more liabilities than liquid assets, it also has net cash of US$833.0k. And we liked the look of last year's 401% year-on-year EBIT growth. So we are not troubled with Elevation Gold Mining's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 4 warning signs with Elevation Gold Mining (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

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.

Valuation is complex, but we're helping make it simple.

Find out whether Elevation Gold Mining is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.

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