Health Check: How Prudently Does Golconda Gold (CVE:GG) Use Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 can see that Golconda Gold Ltd. (CVE:GG) does use debt in its business. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

View our latest analysis for Golconda Gold

What Is Golconda Gold's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Golconda Gold had US$4.14m of debt, an increase on US$1.14m, over one year. However, it does have US$267.2k in cash offsetting this, leading to net debt of about US$3.87m.

A Look At Golconda Gold's Liabilities

According to the last reported balance sheet, Golconda Gold had liabilities of US$8.39m due within 12 months, and liabilities of US$2.05m due beyond 12 months. Offsetting these obligations, it had cash of US$267.2k as well as receivables valued at US$1.22m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$8.95m.

This deficit casts a shadow over the US$5.73m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Golconda Gold would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is Golconda 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.

In the last year Golconda Gold had a loss before interest and tax, and actually shrunk its revenue by 32%, to US$9.6m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Golconda Gold's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable US$3.7m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through US$2.7m in negative free cash flow over the last year. That means it's on the risky side of things. 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. Be aware that Golconda Gold is showing 4 warning signs in our investment analysis , you should know about...

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.