Newlox Gold Ventures (FRA:NGO) Has Debt But No Earnings; Should You Worry?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

See our latest analysis for Newlox Gold Ventures

What Is Newlox Gold Ventures's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 Newlox Gold Ventures had CA$2.34m of debt, an increase on CA$2.23m, over one year. However, its balance sheet shows it holds CA$2.37m in cash, so it actually has CA$25.3k net cash.

How Healthy Is Newlox Gold Ventures' Balance Sheet?

We can see from the most recent balance sheet that Newlox Gold Ventures had liabilities of CA$518.6k falling due within a year, and liabilities of CA$2.45m due beyond that. Offsetting these obligations, it had cash of CA$2.37m as well as receivables valued at CA$139.3k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$465.9k.

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$26.4m company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Newlox Gold Ventures boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Newlox Gold Ventures 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, Newlox Gold Ventures reported revenue of CA$3.1m, which is a gain of 344%, although it did not report any earnings before interest and tax. 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 the fact is that over the last twelve months Newlox Gold Ventures lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CA$3.7m and booked a CA$1.8m accounting loss. With only CA$25.3k on the balance sheet, it would appear that its going to need to raise capital again 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. 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. To that end, you should learn about the 6 warning signs we've spotted with Newlox Gold Ventures (including 3 which are a bit concerning) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.