Golconda Gold (CVE:GG) Is Carrying A Fair Bit Of Debt

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Golconda Gold Ltd. (CVE:GG) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Golconda Gold

What Is Golconda Gold's Net Debt?

The image below, which you can click on for greater detail, shows that Golconda Gold had debt of US$1.88m at the end of September 2022, a reduction from US$10.3m over a year. However, because it has a cash reserve of US$343.9k, its net debt is less, at about US$1.53m.

How Strong Is Golconda Gold's Balance Sheet?

According to the last reported balance sheet, Golconda Gold had liabilities of US$5.29m due within 12 months, and liabilities of US$2.87m due beyond 12 months. On the other hand, it had cash of US$343.9k and US$715.1k worth of receivables due within a year. So it has liabilities totalling US$7.10m more than its cash and near-term receivables, combined.

Golconda Gold has a market capitalization of US$18.3m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Golconda 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.

While it hasn't made a profit, at least Golconda Gold booked its first revenue as a publicly listed company, in the last twelve months.

Caveat Emptor

Over the last twelve months Golconda Gold produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable US$3.1m at the EBIT level. 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 US$6.8m 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. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for Golconda Gold you should be aware of, and 2 of them are a bit concerning.

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.