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. We note that Gold Road Resources Limited (ASX:GOR) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Gold Road Resources Carry?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 Gold Road Resources had AU$63.1m of debt, an increase on none, over one year. But on the other hand it also has AU$63.3m in cash, leading to a AU$142.0k net cash position.
How Strong Is Gold Road Resources's Balance Sheet?
According to the last reported balance sheet, Gold Road Resources had liabilities of AU$40.8m due within 12 months, and liabilities of AU$207.9m due beyond 12 months. Offsetting these obligations, it had cash of AU$63.3m as well as receivables valued at AU$2.03m due within 12 months. So its liabilities total AU$183.4m more than the combination of its cash and short-term receivables.
Of course, Gold Road Resources has a market capitalization of AU$997.5m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Gold Road Resources 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 ultimately the future profitability of the business will decide if Gold Road Resources 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.
Since Gold Road Resources has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.
So How Risky Is Gold Road Resources?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Gold Road Resources lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through AU$177m of cash and made a loss of AU$33m. With only AU$142.0k 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. For riskier companies like Gold Road Resources 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 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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If you spot an error that warrants correction, please contact the editor at email@example.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.