Gowest Gold (CVE:GWA) Is Carrying A Fair Bit Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Gowest Gold Ltd. (CVE:GWA) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Gowest Gold

What Is Gowest Gold's Net Debt?

The chart below, which you can click on for greater detail, shows that Gowest Gold had CA$7.17m in debt in January 2023; about the same as the year before. However, it also had CA$1.28m in cash, and so its net debt is CA$5.89m.

How Strong Is Gowest Gold's Balance Sheet?

We can see from the most recent balance sheet that Gowest Gold had liabilities of CA$15.2m falling due within a year, and liabilities of CA$4.57m due beyond that. On the other hand, it had cash of CA$1.28m and CA$778.8k worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$17.7m.

This deficit isn't so bad because Gowest Gold is worth CA$44.1m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

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

Caveat Emptor

Importantly, Gowest Gold had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CA$1.1m. 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 CA$6.6m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Gowest Gold is showing 6 warning signs in our investment analysis , and 5 of those can't be ignored...

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.