Yahoo Finance Does GFG Resources (CVE:GFG) Have A Healthy Balance Sheet?
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies GFG Resources Inc (CVE:GFG) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for GFG Resources
What Is GFG Resources's Debt?
As you can see below, at the end of March 2019, GFG Resources had CA$20.0k of debt, up from CA$18.8k a year ago. Click the image for more detail. But on the other hand it also has CA$2.89m in cash, leading to a CA$2.87m net cash position.
How Strong Is GFG Resources's Balance Sheet?
According to the last reported balance sheet, GFG Resources had liabilities of CA$1.34m due within 12 months, and liabilities of CA$306.9k due beyond 12 months. Offsetting these obligations, it had cash of CA$2.89m as well as receivables valued at CA$94.8k due within 12 months. So it actually has CA$1.34m more liquid assets than total liabilities.
This short term liquidity is a sign that GFG Resources could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, GFG Resources 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 you can't view debt in total isolation; since GFG Resources 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.
Given its lack of meaningful operating revenue, investors are probably hoping that GFG Resources finds some valuable resources, before it runs out of money.
So How Risky Is GFG Resources?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that GFG Resources had negative earnings before interest and tax (EBIT), over the last year. And over the same period it saw negative free cash outflow of CA$4.4m and booked a CA$912k accounting loss. With only CA$2.9m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. For riskier companies like GFG Resources I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
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.
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