Is Galantas Gold (CVE:GAL) Using Debt In A Risky Way?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Galantas Gold Corporation (CVE:GAL) 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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Galantas Gold

What Is Galantas Gold's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Galantas Gold had debt of CA$19.2m, up from CA$11.9m in one year. And it doesn't have much cash, so its net debt is about the same.

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$15.8m due within 12 months and liabilities of CA$7.69m due beyond that. Offsetting these obligations, it had cash of CA$383.0k as well as receivables valued at CA$204.3k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$22.9m.

This deficit casts a shadow over the CA$9.76m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Galantas Gold would likely require a major re-capitalisation if it had to pay its creditors today. 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 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. Indeed, it lost a very considerable CA$2.3m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through CA$3.6m in negative free cash flow over the last year. So suffice it to say we consider the stock to be 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.

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.