Is Galantas Gold (CVE:GAL) A Risky Investment?

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.' 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. We note that Galantas Gold Corporation (CVE:GAL) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Galantas Gold

What Is Galantas Gold's Net Debt?

As you can see below, at the end of March 2023, Galantas Gold had CA$11.0m of debt, up from CA$4.20m a year ago. Click the image for more detail. However, it does have CA$2.52m in cash offsetting this, leading to net debt of about CA$8.50m.

A Look At Galantas Gold's Liabilities

Zooming in on the latest balance sheet data, we can see that Galantas Gold had liabilities of CA$15.2m due within 12 months and liabilities of CA$2.19m due beyond that. Offsetting these obligations, it had cash of CA$2.52m as well as receivables valued at CA$329.4k due within 12 months. So it has liabilities totalling CA$14.6m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Galantas Gold has a market capitalization of CA$37.8m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Galantas Gold will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Given its lack of meaningful operating revenue, investors are probably hoping that Galantas Gold finds some valuable resources, before it runs out of money.

Caveat Emptor

Importantly, Galantas Gold had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping CA$4.7m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CA$10m 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. Case in point: We've spotted 5 warning signs for Galantas Gold you should be aware of, and 3 of them don't sit too well with us.

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.