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 Galantas Gold Corporation (CVE:GAL) makes use of debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Galantas Gold's Net Debt?
The image below, which you can click on for greater detail, shows that Galantas Gold had debt of CA$4.68m at the end of September 2021, a reduction from CA$6.88m over a year. However, because it has a cash reserve of CA$3.88m, its net debt is less, at about CA$799.1k.
A Look At Galantas Gold's Liabilities
According to the last reported balance sheet, Galantas Gold had liabilities of CA$2.51m due within 12 months, and liabilities of CA$7.97m due beyond 12 months. On the other hand, it had cash of CA$3.88m and CA$543.6k worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$6.05m.
Since publicly traded Galantas Gold shares are worth a total of CA$32.9m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Galantas 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.
Since Galantas Gold has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.
Importantly, Galantas Gold had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CA$3.2m. 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$4.7m of cash over the last year. So in short it's a really risky stock. 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. For instance, we've identified 5 warning signs for Galantas Gold (4 make us uncomfortable) you should be aware of.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.