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Auditors Are Concerned About Horizon Gold (ASX:HRN)

Simply Wall St

When Horizon Gold Limited (ASX:HRN) reported its results to June 2019 its auditors, Ernst & Young LLP could not be sure that it would be able to continue as a going concern in the next year. It is therefore fair to assume that, based on those financials, the company should strengthen its balance sheet in the short term, perhaps by issuing shares.

If the company does have to issue more shares, potential investors will be sure to consider how desperate it is for capital. So it is suddenly extremely important to consider whether the company is taking too much risk on its balance sheet. Debt is always a risk factor in these cases, as creditors could be in a position to wind up the company, in the worst case scenario.

View our latest analysis for Horizon Gold

What Is Horizon Gold's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2019 Horizon Gold had AU$90.0k of debt, an increase on AU$27.0k, over one year. However, its balance sheet shows it holds AU$1.88m in cash, so it actually has AU$1.79m net cash.

ASX:HRN Historical Debt, September 29th 2019

A Look At Horizon Gold's Liabilities

The latest balance sheet data shows that Horizon Gold had liabilities of AU$424.0k due within a year, and liabilities of AU$10.3m falling due after that. Offsetting these obligations, it had cash of AU$1.88m as well as receivables valued at AU$19.0k due within 12 months. So its liabilities total AU$8.85m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Horizon Gold is worth AU$22.2m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Horizon Gold boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Horizon Gold's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

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

So How Risky Is Horizon Gold?

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 Horizon Gold had negative earnings before interest and tax (EBIT), over the last year. Indeed, in that time it burnt through AU$5.4m of cash and made a loss of AU$2.6m. Given it only has net cash of AU$1.79m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. We're too cautious to want to invest in a company after an auditor has expressed doubts about its ability to continue as a going concern. That's because we find it more comfortable to invest in companies that always keep the balance sheet reasonably strong. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Horizon Gold insider transactions.

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.