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.' 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. As with many other companies Royal Gold, Inc. (NASDAQ:RGLD) makes use of debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Royal Gold's Net Debt?
As you can see below, Royal Gold had US$95.4m of debt at September 2021, down from US$270.7m a year prior. However, it does have US$160.2m in cash offsetting this, leading to net cash of US$64.8m.
How Healthy Is Royal Gold's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Royal Gold had liabilities of US$60.3m due within 12 months and liabilities of US$190.9m due beyond that. On the other hand, it had cash of US$160.2m and US$57.0m worth of receivables due within a year. So it has liabilities totalling US$33.9m more than its cash and near-term receivables, combined.
Having regard to Royal Gold's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$6.84b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Royal Gold boasts net cash, so it's fair to say it does not have a heavy debt load!
In addition to that, we're happy to report that Royal Gold has boosted its EBIT by 47%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Royal Gold can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Royal Gold has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Royal Gold produced sturdy free cash flow equating to 70% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.
We could understand if investors are concerned about Royal Gold's liabilities, but we can be reassured by the fact it has has net cash of US$64.8m. And we liked the look of last year's 47% year-on-year EBIT growth. So is Royal Gold's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Royal Gold, you may well want to click here to check an interactive graph of its earnings per share history.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.