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Is Viva Gold (CVE:VAU) Using Too Much 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. As with many other companies Viva Gold Corp. (CVE:VAU) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Viva Gold

What Is Viva Gold's Debt?

The image below, which you can click on for greater detail, shows that at April 2019 Viva Gold had debt of CA$291.1k, up from CA$256.7k in one year. On the flip side, it has CA$87.3k in cash leading to net debt of about CA$203.8k.

TSXV:VAU Historical Debt, July 26th 2019
TSXV:VAU Historical Debt, July 26th 2019

How Healthy Is Viva Gold's Balance Sheet?

The latest balance sheet data shows that Viva Gold had liabilities of CA$465.0k due within a year, and liabilities of CA$166.4k falling due after that. On the other hand, it had cash of CA$87.3k and CA$188.8k worth of receivables due within a year. So it has liabilities totalling CA$355.3k more than its cash and near-term receivables, combined.

Given Viva Gold has a market capitalization of CA$7.48m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Viva Gold will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Since Viva Gold has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.

Caveat Emptor

Over the last twelve months Viva Gold produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable CA$1.6m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CA$1.5m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very 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 Viva Gold insider transactions.

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.

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.

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