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Health Check: How Prudently Does Austral Gold (ASX:AGD) Use Debt?

Simply Wall St

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. As with many other companies Austral Gold Limited (ASX:AGD) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Austral Gold

What Is Austral Gold's Debt?

You can click the graphic below for the historical numbers, but it shows that Austral Gold had US$9.89m of debt in June 2019, down from US$22.6m, one year before. However, it also had US$2.70m in cash, and so its net debt is US$7.18m.

ASX:AGD Historical Debt, September 12th 2019

A Look At Austral Gold's Liabilities

According to the last reported balance sheet, Austral Gold had liabilities of US$26.0m due within 12 months, and liabilities of US$24.4m due beyond 12 months. Offsetting these obligations, it had cash of US$2.70m as well as receivables valued at US$2.22m due within 12 months. So its liabilities total US$45.4m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the US$29.3m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt After all, Austral Gold would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Austral 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.

In the last year Austral Gold actually shrunk its revenue by 5.5%, to US$104m. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Austral Gold produced an earnings before interest and tax (EBIT) loss. Indeed, it lost US$2.8m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of-US$25.3m. In the meantime, we consider the stock to be risky. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Austral Gold insider transactions.

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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.