Is Superior Gold (CVE:SGI) A Risky Investment?

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. Importantly, Superior Gold Inc. (CVE:SGI) does carry debt. 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. 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, 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Superior Gold

What Is Superior Gold's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Superior Gold had US$1.55m of debt, an increase on US$1.38m, over one year. But on the other hand it also has US$8.14m in cash, leading to a US$6.59m net cash position.

How Healthy Is Superior Gold's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Superior Gold had liabilities of US$38.0m due within 12 months and liabilities of US$30.4m due beyond that. On the other hand, it had cash of US$8.14m and US$1.34m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$59.0m.

The deficiency here weighs heavily on the US$17.5m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Superior Gold would probably need a major re-capitalization if its creditors were to demand repayment. Superior Gold boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Superior Gold can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Superior Gold made a loss at the EBIT level, and saw its revenue drop to US$113m, which is a fall of 18%. We would much prefer see growth.

So How Risky Is Superior Gold?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Superior Gold had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$8.2m of cash and made a loss of US$14m. With only US$6.59m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. For example - Superior Gold has 2 warning signs we think you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.