Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Chaarat Gold Holdings Limited (LON:CGH) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.
What Is Chaarat Gold Holdings's Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 Chaarat Gold Holdings had US$82.0m of debt, an increase on US$21.5m, over one year. However, because it has a cash reserve of US$4.91m, its net debt is less, at about US$77.1m.
How Strong Is Chaarat Gold Holdings's Balance Sheet?
The latest balance sheet data shows that Chaarat Gold Holdings had liabilities of US$66.4m due within a year, and liabilities of US$45.8m falling due after that. On the other hand, it had cash of US$4.91m and US$15.3m worth of receivables due within a year. So its liabilities total US$91.9m more than the combination of its cash and short-term receivables.
This deficit isn't so bad because Chaarat Gold Holdings is worth US$156.8m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Chaarat Gold Holdings 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.
While it hasn't made a profit, at least Chaarat Gold Holdings booked its first revenue as a publicly listed company, in the last twelve months.
Over the last twelve months Chaarat Gold Holdings produced an earnings before interest and tax (EBIT) loss. Indeed, it lost US$14m at the EBIT level. 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$16m of cash over the last year. So in short it's a really risky stock. For riskier companies like Chaarat Gold Holdings I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
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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