Does SolGold (LON:SOLG) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, SolGold Plc (LON:SOLG) does carry debt. But the more important question is: how much risk is that debt creating?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for SolGold

What Is SolGold's Net Debt?

As you can see below, at the end of September 2023, SolGold had US$151.0m of debt, up from US$86.6m a year ago. Click the image for more detail. However, it does have US$22.9m in cash offsetting this, leading to net debt of about US$128.1m.

How Healthy Is SolGold's Balance Sheet?

The latest balance sheet data shows that SolGold had liabilities of US$11.2m due within a year, and liabilities of US$155.4m falling due after that. Offsetting this, it had US$22.9m in cash and US$7.67m in receivables that were due within 12 months. So its liabilities total US$136.0m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since SolGold has a market capitalization of US$386.2m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine SolGold's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Since SolGold has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.

Caveat Emptor

Importantly, SolGold had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$19m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any 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 US$31m of cash over the last year. So in short it's a really risky stock. 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 5 warning signs for SolGold you should be aware of, and 4 of them are significant.

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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