Is Golconda Gold (CVE:GG) A Risky Investment?

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 Golconda Gold Ltd. (CVE:GG) 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?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Golconda Gold

How Much Debt Does Golconda Gold Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Golconda Gold had US$4.33m of debt, an increase on US$1.88m, over one year. However, it does have US$143.7k in cash offsetting this, leading to net debt of about US$4.18m.

How Healthy Is Golconda Gold's Balance Sheet?

According to the last reported balance sheet, Golconda Gold had liabilities of US$8.10m due within 12 months, and liabilities of US$2.08m due beyond 12 months. On the other hand, it had cash of US$143.7k and US$984.4k worth of receivables due within a year. So it has liabilities totalling US$9.05m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of US$9.71m, so it does suggest shareholders should keep an eye on Golconda Gold's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Golconda Gold had a loss before interest and tax, and actually shrunk its revenue by 26%, to US$10m. To be frank that doesn't bode well.

Caveat Emptor

While Golconda Gold's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping US$2.4m. 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$2.1m of cash over the last year. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Golconda Gold you should be aware of, and 2 of them are potentially serious.

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.