Is Scorpio Gold (CVE:SGN) Weighed On By Its Debt Load?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Scorpio Gold

What Is Scorpio Gold's Debt?

As you can see below, at the end of March 2024, Scorpio Gold had US$3.79m of debt, up from US$3.16m a year ago. Click the image for more detail. However, because it has a cash reserve of US$2.42m, its net debt is less, at about US$1.36m.

A Look At Scorpio Gold's Liabilities

According to the last reported balance sheet, Scorpio Gold had liabilities of US$9.06m due within 12 months, and liabilities of US$5.66m due beyond 12 months. On the other hand, it had cash of US$2.42m and US$114.7k worth of receivables due within a year. So it has liabilities totalling US$12.2m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of US$11.2m, we think shareholders really should watch Scorpio Gold's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Scorpio Gold will need earnings to service that debt. 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.

Given its lack of meaningful operating revenue, investors are probably hoping that Scorpio Gold finds some valuable resources, before it runs out of money.

Caveat Emptor

Importantly, Scorpio Gold had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable US$2.3m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through US$3.0m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Scorpio Gold is showing 6 warning signs in our investment analysis , and 4 of those are significant...

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.