Is Scorpio Gold (CVE:SGN) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Scorpio Gold Corporation (CVE:SGN) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Scorpio Gold

What Is Scorpio Gold's Debt?

The image below, which you can click on for greater detail, shows that at September 2022 Scorpio Gold had debt of US$2.97m, up from none in one year. However, it also had US$1.23m in cash, and so its net debt is US$1.75m.

How Strong Is Scorpio Gold's Balance Sheet?

According to the last reported balance sheet, Scorpio Gold had liabilities of US$3.19m due within 12 months, and liabilities of US$6.05m due beyond 12 months. Offsetting these obligations, it had cash of US$1.23m as well as receivables valued at US$23.0k due within 12 months. So its liabilities total US$7.99m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of US$6.14m, 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. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Scorpio 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.

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%. To be frank that doesn't bode well.

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. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of US$2.5m over the last twelve months. So suffice it to say we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 6 warning signs with Scorpio Gold , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.