Scotgold Resources (LON:SGZ) Is Carrying A Fair Bit Of 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. Importantly, Scotgold Resources Limited (LON:SGZ) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, 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.

View our latest analysis for Scotgold Resources

What Is Scotgold Resources's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 Scotgold Resources had AU$16.2m of debt, an increase on AU$12.5m, over one year. However, because it has a cash reserve of AU$963.2k, its net debt is less, at about AU$15.2m.

How Healthy Is Scotgold Resources' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Scotgold Resources had liabilities of AU$15.9m due within 12 months and liabilities of AU$10.4m due beyond that. On the other hand, it had cash of AU$963.2k and AU$946.4k worth of receivables due within a year. So it has liabilities totalling AU$24.3m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Scotgold Resources is worth AU$76.6m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Scotgold Resources's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

While it hasn't made a profit, at least Scotgold Resources booked its first revenue as a publicly listed company, in the last twelve months.

Caveat Emptor

Importantly, Scotgold Resources had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at AU$5.4m. 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 AU$6.2m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. Case in point: We've spotted 4 warning signs for Scotgold Resources you should be aware of, and 1 of them makes us a bit uncomfortable.

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.