Gowest Gold (CVE:GWA) Has Debt But No Earnings; Should You Worry?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Gowest Gold Ltd. (CVE:GWA) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Gowest Gold

What Is Gowest Gold's Debt?

The image below, which you can click on for greater detail, shows that Gowest Gold had debt of CA$4.46m at the end of April 2022, a reduction from CA$23.7m over a year. However, it does have CA$6.60m in cash offsetting this, leading to net cash of CA$2.14m.

How Healthy Is Gowest Gold's Balance Sheet?

We can see from the most recent balance sheet that Gowest Gold had liabilities of CA$14.2m falling due within a year, and liabilities of CA$5.84m due beyond that. Offsetting this, it had CA$6.60m in cash and CA$34.6k in receivables that were due within 12 months. So it has liabilities totalling CA$13.4m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of CA$18.0m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, Gowest Gold also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Gowest 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.

Given its lack of meaningful operating revenue, investors are probably hoping that Gowest Gold finds some valuable resources, before it runs out of money.

So How Risky Is Gowest Gold?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Gowest Gold had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CA$3.5m and booked a CA$4.6m accounting loss. Given it only has net cash of CA$2.14m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 5 warning signs for Gowest Gold you should be aware of, and 4 of them make us uncomfortable.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.