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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Gowest Gold Ltd. (CVE:GWA) does have debt on its balance sheet. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, 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 Gowest Gold's Net Debt?
The image below, which you can click on for greater detail, shows that Gowest Gold had debt of CA$4.46m at the end of April 2022, a reduction from CA$23.7m over a year. However, its balance sheet shows it holds CA$6.60m in cash, so it actually has CA$2.14m net cash.
How Healthy Is Gowest Gold's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Gowest Gold had liabilities of CA$14.2m due within 12 months and liabilities of CA$5.84m due beyond that. Offsetting this, it had CA$6.60m in cash and CA$34.6k in receivables that were due within 12 months. So it has liabilities totalling CA$13.4m more than its cash and near-term receivables, combined.
This deficit isn't so bad because Gowest Gold is worth CA$27.6m, 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, Gowest Gold boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Gowest Gold will need earnings to service that debt. 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 Gowest Gold has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.
So How Risky Is Gowest Gold?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Gowest Gold had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CA$3.5m and booked a CA$4.6m accounting loss. Given it only has net cash of CA$2.14m, 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for Gowest Gold (of which 3 shouldn't be ignored!) you should know about.
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.