Here's Why Newlox Gold Ventures (FRA:NGO) Can Afford Some 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Newlox Gold Ventures Corp. (FRA:NGO) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Newlox Gold Ventures

How Much Debt Does Newlox Gold Ventures Carry?

As you can see below, at the end of June 2021, Newlox Gold Ventures had CA$3.22m of debt, up from none a year ago. Click the image for more detail. On the flip side, it has CA$3.20m in cash leading to net debt of about CA$28.5k.

A Look At Newlox Gold Ventures' Liabilities

According to the last reported balance sheet, Newlox Gold Ventures had liabilities of CA$392.5k due within 12 months, and liabilities of CA$3.41m due beyond 12 months. Offsetting this, it had CA$3.20m in cash and CA$60.1k in receivables that were due within 12 months. So it has liabilities totalling CA$542.0k more than its cash and near-term receivables, combined.

Having regard to Newlox Gold Ventures' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CA$47.0m company is struggling for cash, we still think it's worth monitoring its balance sheet. But either way, Newlox Gold Ventures has virtually no net debt, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Newlox Gold Ventures's earnings that will influence how the balance sheet holds up in the future. 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 it has no significant operating revenue at the moment, shareholders will be hoping Newlox Gold Ventures can make progress and gain better traction for the business, before it runs low on cash.

Caveat Emptor

While Newlox Gold Ventures's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CA$2.3m. 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. However, it doesn't help that it burned through CA$1.8m of cash over the last year. So suffice it to say we do 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. For instance, we've identified 5 warning signs for Newlox Gold Ventures (2 are a bit concerning) 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.

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.

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