Is Gowest Gold (CVE:GWA) Weighed On By Its Debt Load?

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. We note that Gowest Gold Ltd. (CVE:GWA) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Gowest Gold

How Much Debt Does Gowest Gold Carry?

You can click the graphic below for the historical numbers, but it shows that as of April 2021 Gowest Gold had CA$23.7m of debt, an increase on CA$14.9m, over one year. Net debt is about the same, since the it doesn't have much cash.

How Strong Is Gowest Gold's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Gowest Gold had liabilities of CA$24.4m due within 12 months and liabilities of CA$11.3m due beyond that. Offsetting this, it had CA$171.9k in cash and CA$334.9k in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$35.2m.

This deficit casts a shadow over the CA$14.8m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Gowest Gold would likely require a major re-capitalisation if it had to pay its creditors today. 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.

Caveat Emptor

Over the last twelve months Gowest Gold produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping CA$3.9m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of CA$4.9m over the last twelve months. That means it's on the risky side of things. 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. These risks can be hard to spot. Every company has them, and we've spotted 6 warning signs for Gowest Gold (of which 3 can't be ignored!) you should know about.

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.
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