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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Majestic Gold Corp. (CVE:MJS) does use debt in its business. But should shareholders be worried about its use of debt?
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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
What Is Majestic Gold's Net Debt?
As you can see below, Majestic Gold had US$4.73m of debt, at March 2022, which is about the same as the year before. You can click the chart for greater detail. But it also has US$42.1m in cash to offset that, meaning it has US$37.3m net cash.
A Look At Majestic Gold's Liabilities
The latest balance sheet data shows that Majestic Gold had liabilities of US$25.5m due within a year, and liabilities of US$10.9m falling due after that. Offsetting these obligations, it had cash of US$42.1m as well as receivables valued at US$215.2k due within 12 months. So it can boast US$5.96m more liquid assets than total liabilities.
This surplus suggests that Majestic Gold has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Majestic Gold has more cash than debt is arguably a good indication that it can manage its debt safely.
Majestic Gold's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Majestic 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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 67% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.
While we empathize with investors who find debt concerning, you should keep in mind that Majestic Gold has net cash of US$37.3m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$17m, being 67% of its EBIT. So we don't think Majestic Gold's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Majestic Gold is showing 3 warning signs in our investment analysis , you should know about...
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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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