Is Newlox Gold Ventures (FRA:NGO) Using Debt In A Risky Way?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that Newlox Gold Ventures Corp. (FRA:NGO) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 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

What Is Newlox Gold Ventures's Debt?

You can click the graphic below for the historical numbers, but it shows that Newlox Gold Ventures had CA$2.36m of debt in June 2022, down from CA$3.22m, one year before. However, its balance sheet shows it holds CA$3.05m in cash, so it actually has CA$687.5k net cash.

A Look At Newlox Gold Ventures' Liabilities

We can see from the most recent balance sheet that Newlox Gold Ventures had liabilities of CA$561.8k falling due within a year, and liabilities of CA$2.47m due beyond that. On the other hand, it had cash of CA$3.05m and CA$91.6k worth of receivables due within a year. So it can boast CA$109.6k more liquid assets than total liabilities.

This state of affairs indicates that Newlox Gold Ventures' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CA$14.6m company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Newlox Gold Ventures boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Newlox Gold Ventures'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.

In the last year Newlox Gold Ventures wasn't profitable at an EBIT level, but managed to grow its revenue by 576%, to CA$2.5m. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

So How Risky Is Newlox Gold Ventures?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Newlox Gold Ventures had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CA$3.7m and booked a CA$2.0m accounting loss. Given it only has net cash of CA$687.5k, the company may need to raise more capital if it doesn't reach break-even soon. The good news for shareholders is that Newlox Gold Ventures has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 6 warning signs with Newlox Gold Ventures (at least 3 which are concerning) , 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.