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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Gowest Gold Ltd. (CVE:GWA) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

See our latest analysis for Gowest Gold

How Much Debt Does Gowest Gold Carry?

The image below, which you can click on for greater detail, shows that Gowest Gold had debt of CA$5.77m at the end of July 2023, a reduction from CA$6.17m over a year. However, it does have CA$20.8m in cash offsetting this, leading to net cash of CA$15.1m.

A Look At Gowest Gold's Liabilities

According to the last reported balance sheet, Gowest Gold had liabilities of CA$5.77m due within 12 months, and liabilities of CA$6.65m due beyond 12 months. Offsetting this, it had CA$20.8m in cash and CA$1.52m in receivables that were due within 12 months. So it can boast CA$9.93m more liquid assets than total liabilities.

This surplus suggests that Gowest Gold is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Gowest Gold boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Gowest Gold will need earnings to service that debt. 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.

Since Gowest Gold has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.

So How Risky Is Gowest Gold?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Gowest Gold lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CA$23m and booked a CA$3.0m accounting loss. Given it only has net cash of CA$15.1m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 5 warning signs for Gowest Gold (4 make us uncomfortable) you should be aware of.

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.