Health Check: How Prudently Does Scorpio Gold (CVE:SGN) Use 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 Scorpio Gold Corporation (CVE:SGN) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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, 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.

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What Is Scorpio Gold's Debt?

As you can see below, at the end of September 2022, Scorpio Gold had US$2.97m of debt, up from none a year ago. Click the image for more detail. However, because it has a cash reserve of US$1.23m, its net debt is less, at about US$1.75m.

How Healthy Is Scorpio Gold's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Scorpio Gold had liabilities of US$3.19m due within 12 months and liabilities of US$6.05m due beyond that. Offsetting this, it had US$1.23m in cash and US$23.0k in receivables that were due within 12 months. So it has liabilities totalling US$7.99m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of US$7.83m, we think shareholders really should watch Scorpio Gold's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Scorpio Gold's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Scorpio Gold made a loss at the EBIT level, and saw its revenue drop to US$839k, which is a fall of 76%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Scorpio Gold's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable US$6.1m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of US$2.5m over the last twelve months. That means it's on the risky side of things. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 6 warning signs for Scorpio Gold 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.