Is Galantas Gold (CVE:GAL) Using Too Much Debt?

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.' 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. 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?

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. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Galantas Gold

How Much Debt Does Galantas Gold Carry?

As you can see below, at the end of June 2024, Galantas Gold had CA$18.2m of debt, up from CA$11.4m a year ago. Click the image for more detail. On the flip side, it has CA$395.5k in cash leading to net debt of about CA$17.8m.

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$14.7m due within 12 months and liabilities of CA$7.74m due beyond that. On the other hand, it had cash of CA$395.5k and CA$180.2k worth of receivables due within a year. So its liabilities total CA$21.8m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of CA$14.9m, we think shareholders really should watch Galantas Gold's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. 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.

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

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$2.5m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through CA$3.9m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example Galantas Gold has 5 warning signs (and 4 which shouldn't be ignored) we think you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.