Is Galantas Gold (CVE:GAL) Using Debt Sensibly?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. 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?

We've discovered 5 warning signs about Galantas Gold. View them for free.

Why Does Debt Bring Risk?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Galantas Gold's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Galantas Gold had CA$6.68m of debt in December 2024, down from CA$16.8m, one year before. However, because it has a cash reserve of CA$525.6k, its net debt is less, at about CA$6.15m.

How Strong Is Galantas Gold's Balance Sheet?

The latest balance sheet data shows that Galantas Gold had liabilities of CA$17.3m due within a year, and liabilities of CA$7.35m falling due after that. Offsetting these obligations, it had cash of CA$525.6k as well as receivables valued at CA$364.4k due within 12 months. So it has liabilities totalling CA$23.8m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CA$6.89m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Galantas Gold would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Galantas Gold will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

See our latest analysis for Galantas Gold

Since Galantas Gold has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.

Caveat Emptor

Over the last twelve months Galantas Gold produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable CA$2.8m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized CA$3.2m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is risky, like walking through a dirty dog park with a mask on. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Galantas Gold has 5 warning signs we think you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.