Is SolGold (LON:SOLG) Using Debt In A Risky Way?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, SolGold Plc (LON:SOLG) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for SolGold

How Much Debt Does SolGold Carry?

As you can see below, at the end of June 2021, SolGold had US$106.6m of debt, up from US$15.2m a year ago. Click the image for more detail. However, it does have US$109.6m in cash offsetting this, leading to net cash of US$2.99m.

How Healthy Is SolGold's Balance Sheet?

We can see from the most recent balance sheet that SolGold had liabilities of US$8.18m falling due within a year, and liabilities of US$110.1m due beyond that. Offsetting this, it had US$109.6m in cash and US$13.7m in receivables that were due within 12 months. So it actually has US$5.01m more liquid assets than total liabilities.

This state of affairs indicates that SolGold's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$792.1m company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, SolGold 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 ultimately the future profitability of the business will decide if SolGold can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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

So How Risky Is SolGold?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that SolGold had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$20m of cash and made a loss of US$23m. With only US$2.99m on the balance sheet, it would appear that its going to need to raise capital again soon. 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. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 5 warning signs we've spotted with SolGold (including 2 which are significant) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.

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