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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that SolGold Plc (LON:SOLG) does use debt in its business. But the real question is whether this debt is making the company risky.

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for SolGold

What Is SolGold's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 SolGold had debt of US$198.9m, up from US$147.0m in one year. On the flip side, it has US$6.03m in cash leading to net debt of about US$192.9m.

How Healthy Is SolGold's Balance Sheet?

According to the last reported balance sheet, SolGold had liabilities of US$17.3m due within 12 months, and liabilities of US$191.9m due beyond 12 months. On the other hand, it had cash of US$6.03m and US$2.90m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$200.3m.

While this might seem like a lot, it is not so bad since SolGold has a market capitalization of US$386.3m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 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.

Given its lack of meaningful operating revenue, investors are probably hoping that SolGold finds some valuable resources, before it runs out of money.

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$22m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$10m of cash over the last year. So suffice it to say we do consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 5 warning signs for SolGold (2 are significant!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.