Would Sonoro Gold (CVE:SGO) Be Better Off With Less Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Sonoro Gold Corp. (CVE:SGO) makes use of debt. But the real question is whether this debt is making the company risky.

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When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Sonoro Gold's Debt?

As you can see below, at the end of December 2024, Sonoro Gold had CA$4.89m of debt, up from CA$3.41m a year ago. Click the image for more detail. However, it also had CA$214.1k in cash, and so its net debt is CA$4.67m.

How Strong Is Sonoro Gold's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sonoro Gold had liabilities of CA$6.87m due within 12 months and no liabilities due beyond that. Offsetting these obligations, it had cash of CA$214.1k as well as receivables valued at CA$1.11m due within 12 months. So its liabilities total CA$5.55m more than the combination of its cash and short-term receivables.

Sonoro Gold has a market capitalization of CA$27.1m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Sonoro 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.

View our latest analysis for Sonoro Gold

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

Caveat Emptor

Importantly, Sonoro Gold had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CA$534k. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CA$3.9m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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, we've discovered 5 warning signs for Sonoro Gold (3 are significant!) that you should be aware of before investing here.

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.