Does Galantas Gold (CVE:GAL) Have A Healthy Balance Sheet?
The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Galantas Gold Corporation (CVE:GAL) does use debt in its business. But the more important question is: how much risk is that debt creating?
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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Galantas Gold
What Is Galantas Gold's Net Debt?
The image below, which you can click on for greater detail, shows that Galantas Gold had debt of CA$4.60m at the end of June 2021, a reduction from CA$6.59m over a year. But on the other hand it also has CA$6.14m in cash, leading to a CA$1.54m net cash position.
How Healthy Is Galantas Gold's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Galantas Gold had liabilities of CA$2.49m due within 12 months and liabilities of CA$7.77m due beyond that. Offsetting this, it had CA$6.14m in cash and CA$697.0k in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$3.43m.
Given Galantas Gold has a market capitalization of CA$31.9m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Galantas 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 Galantas 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.
Since Galantas Gold has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.
So How Risky Is Galantas Gold?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Galantas Gold had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CA$2.3m of cash and made a loss of CA$5.3m. With only CA$1.54m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. To that end, you should learn about the 5 warning signs we've spotted with Galantas Gold (including 3 which are concerning) .
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.
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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