We Think Roxgold (TSE:ROXG) Can Stay On Top Of Its Debt
Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Roxgold Inc. (TSE:ROXG) does carry debt. But the more important question is: how much risk is that debt creating?
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. If things get really bad, the lenders can take control of the business. 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. 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 Roxgold
What Is Roxgold's Net Debt?
The image below, which you can click on for greater detail, shows that at September 2020 Roxgold had debt of US$35.9m, up from US$27.9m in one year. However, it does have US$50.1m in cash offsetting this, leading to net cash of US$14.2m.
A Look At Roxgold's Liabilities
The latest balance sheet data shows that Roxgold had liabilities of US$71.4m due within a year, and liabilities of US$59.0m falling due after that. On the other hand, it had cash of US$50.1m and US$25.5m worth of receivables due within a year. So it has liabilities totalling US$54.8m more than its cash and near-term receivables, combined.
Given Roxgold has a market capitalization of US$431.6m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Roxgold boasts net cash, so it's fair to say it does not have a heavy debt load!
In addition to that, we're happy to report that Roxgold has boosted its EBIT by 74%, thus reducing the spectre of future debt repayments. 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 Roxgold's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Roxgold has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Roxgold reported free cash flow worth 11% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.
Summing up
While Roxgold does have more liabilities than liquid assets, it also has net cash of US$14.2m. And it impressed us with its EBIT growth of 74% over the last year. So we are not troubled with Roxgold's debt use. We'd be motivated to research the stock further if we found out that Roxgold insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.
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.
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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