Is Golconda Gold (CVE:GG) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Golconda Gold Ltd. (CVE:GG) does have debt on its balance sheet. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. 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?

The image below, which you can click on for greater detail, shows that at September 2024 Golconda Gold had debt of US$4.51m, up from US$4.33m in one year. However, it does have US$508.2k in cash offsetting this, leading to net debt of about US$4.00m.

A Look At Golconda Gold's Liabilities

According to the last reported balance sheet, Golconda Gold had liabilities of US$9.42m due within 12 months, and liabilities of US$7.11m due beyond 12 months. On the other hand, it had cash of US$508.2k and US$1.81m worth of receivables due within a year. So it has liabilities totalling US$14.2m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of US$15.8m, so it does suggest shareholders should keep an eye on Golconda Gold's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 14%, to US$11m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Golconda Gold produced an earnings before interest and tax (EBIT) loss. Indeed, it lost US$901k 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. Another cause for caution is that is bled US$3.7m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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, we've discovered 3 warning signs for Golconda Gold (1 doesn't sit too well with us!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.