Majestic Gold (CVE:MJS) Seems To Use Debt Rather Sparingly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, Majestic Gold Corp. (CVE:MJS) does carry debt. But the more important question is: how much risk is that debt creating?

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Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Majestic Gold's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2025 Majestic Gold had US$16.7m of debt, an increase on US$4.23m, over one year. But it also has US$107.6m in cash to offset that, meaning it has US$90.9m net cash.

How Strong Is Majestic Gold's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Majestic Gold had liabilities of US$58.3m due within 12 months and liabilities of US$36.3m due beyond that. On the other hand, it had cash of US$107.6m and US$4.21m worth of receivables due within a year. So it actually has US$17.2m more liquid assets than total liabilities.

It's good to see that Majestic Gold has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Majestic Gold has more cash than debt is arguably a good indication that it can manage its debt safely.

See our latest analysis for Majestic Gold

In addition to that, we're happy to report that Majestic Gold has boosted its EBIT by 49%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Majestic 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Majestic Gold has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Majestic Gold produced sturdy free cash flow equating to 78% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Majestic Gold has US$90.9m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 49% over the last year. So we don't think Majestic Gold's use of debt is risky. Another factor that would give us confidence in Majestic Gold would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

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.