We Think Magna Gold (CVE:MGR) Has A Fair Chunk Of Debt

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. We note that Magna Gold Corp. (CVE:MGR) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Magna Gold

What Is Magna Gold's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Magna Gold had US$7.10m of debt, an increase on none, over one year. However, because it has a cash reserve of US$6.86m, its net debt is less, at about US$237.0k.

A Look At Magna Gold's Liabilities

Zooming in on the latest balance sheet data, we can see that Magna Gold had liabilities of US$40.6m due within 12 months and liabilities of US$17.0m due beyond that. On the other hand, it had cash of US$6.86m and US$11.1m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$39.6m.

This deficit is considerable relative to its market capitalization of US$50.9m, so it does suggest shareholders should keep an eye on Magna Gold's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Carrying virtually no net debt, Magna Gold has a very light debt load indeed. There's no doubt that we learn most about debt from the balance sheet. But it is Magna Gold's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year Magna Gold wasn't profitable at an EBIT level, but managed to grow its revenue by 330%, to US$96m. That's virtually the hole-in-one of revenue growth!

Caveat Emptor

Even though Magna Gold managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at US$1.6m. 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$12m of cash over the last year. So in short it's a really risky stock. 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. We've identified 3 warning signs with Magna Gold (at least 1 which is significant) , and understanding them should be part of your investment process.

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.