Lumina Gold (CVE:LUM) Has Debt But No Earnings; Should You Worry?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Lumina Gold Corp. (CVE:LUM) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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.

See our latest analysis for Lumina Gold

What Is Lumina Gold's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Lumina Gold had US$4.59m of debt, an increase on none, over one year. However, it does have US$5.14m in cash offsetting this, leading to net cash of US$548.2k.

How Healthy Is Lumina Gold's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Lumina Gold had liabilities of US$5.08m due within 12 months and no liabilities due beyond that. Offsetting this, it had US$5.14m in cash and US$44.9k in receivables that were due within 12 months. So it can boast US$105.2k more liquid assets than total liabilities.

Having regard to Lumina Gold's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$187.4m company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Lumina Gold boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Lumina Gold can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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

So How Risky Is Lumina Gold?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Lumina 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 US$5.5m and booked a US$6.7m accounting loss. With only US$548.2k on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for Lumina Gold (of which 2 are a bit unpleasant!) you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.