Is Pure Gold Mining (CVE:PGM) A Risky Investment?

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 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. As with many other companies Pure Gold Mining Inc. (CVE:PGM) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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.

View our latest analysis for Pure Gold Mining

How Much Debt Does Pure Gold Mining Carry?

As you can see below, at the end of September 2021, Pure Gold Mining had CA$122.7m of debt, up from CA$49.7m a year ago. Click the image for more detail. On the flip side, it has CA$24.5m in cash leading to net debt of about CA$98.2m.

A Look At Pure Gold Mining's Liabilities

According to the last reported balance sheet, Pure Gold Mining had liabilities of CA$38.9m due within 12 months, and liabilities of CA$177.6m due beyond 12 months. Offsetting this, it had CA$24.5m in cash and CA$1.19m in receivables that were due within 12 months. So its liabilities total CA$190.8m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of CA$278.0m, so it does suggest shareholders should keep an eye on Pure Gold Mining's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Pure Gold Mining's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

While it hasn't made a profit, at least Pure Gold Mining booked its first revenue as a publicly listed company, in the last twelve months.

Caveat Emptor

Over the last twelve months Pure Gold Mining produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CA$25m at the EBIT level. 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. Another cause for caution is that is bled CA$135m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 3 warning signs we've spotted with Pure Gold Mining .

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.