Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Gran Colombia Gold Corp. (TSE:GCM) 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 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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
What Is Gran Colombia Gold's Debt?
As you can see below, Gran Colombia Gold had US$59.5m of debt at March 2020, down from US$72.4m a year prior. But it also has US$99.7m in cash to offset that, meaning it has US$40.2m net cash.
A Look At Gran Colombia Gold's Liabilities
The latest balance sheet data shows that Gran Colombia Gold had liabilities of US$67.1m due within a year, and liabilities of US$113.0m falling due after that. On the other hand, it had cash of US$99.7m and US$23.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$56.6m.
Of course, Gran Colombia Gold has a market capitalization of US$338.5m, so these liabilities are probably manageable. 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, Gran Colombia 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 future earnings, more than anything, that will determine Gran Colombia Gold's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Gran Colombia Gold reported revenue of US$336m, which is a gain of 25%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Gran Colombia Gold?
While Gran Colombia Gold lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$67m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. The good news for Gran Colombia Gold shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But we still think it's somewhat risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Gran Colombia Gold that you should be aware of.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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. 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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