Is Cora Gold (LON:CORA) Using Debt In A Risky Way?

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. We note that Cora Gold Limited (LON:CORA) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Cora Gold

What Is Cora Gold's Debt?

The image below, which you can click on for greater detail, shows that at December 2023 Cora Gold had debt of US$15.9m, up from none in one year. However, its balance sheet shows it holds US$16.9m in cash, so it actually has US$989.0k net cash.

How Strong Is Cora Gold's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Cora Gold had liabilities of US$16.1m due within 12 months and no liabilities due beyond that. Offsetting this, it had US$16.9m in cash and US$85.0k in receivables that were due within 12 months. So it actually has US$820.0k more liquid assets than total liabilities.

This surplus suggests that Cora Gold has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Cora Gold boasts net cash, 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 Cora Gold'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 its lack of meaningful operating revenue, investors are probably hoping that Cora Gold finds some valuable resources, before it runs out of money.

So How Risky Is Cora Gold?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Cora Gold 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 US$2.2m and booked a US$3.0m accounting loss. But the saving grace is the US$989.0k on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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 Cora Gold has 4 warning signs (and 2 which don't sit too well with us) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.