Yahoo Finance Here's Why Gold Road Resources (ASX:GOR) Can Manage Its Debt Responsibly
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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Gold Road Resources Limited (ASX:GOR) makes use of debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Gold Road Resources
What Is Gold Road Resources's Debt?
The image below, which you can click on for greater detail, shows that Gold Road Resources had debt of AU$23.7m at the end of June 2020, a reduction from AU$63.1m over a year. But it also has AU$73.7m in cash to offset that, meaning it has AU$50.0m net cash.
How Strong Is Gold Road Resources's Balance Sheet?
According to the last reported balance sheet, Gold Road Resources had liabilities of AU$48.7m due within 12 months, and liabilities of AU$173.7m due beyond 12 months. Offsetting this, it had AU$73.7m in cash and AU$2.23m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$146.5m.
Since publicly traded Gold Road Resources shares are worth a total of AU$1.12b, it seems unlikely that this level of liabilities would be a major 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, Gold Road Resources boasts net cash, so it's fair to say it does not have a heavy debt load!
It was also good to see that despite losing money on the EBIT line last year, Gold Road Resources turned things around in the last 12 months, delivering and EBIT of AU$56m. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Gold Road Resources can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Gold Road Resources 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. Happily for any shareholders, Gold Road Resources actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Summing up
While Gold Road Resources does have more liabilities than liquid assets, it also has net cash of AU$50.0m. The cherry on top was that in converted 124% of that EBIT to free cash flow, bringing in AU$69m. So is Gold Road Resources's debt a risk? It doesn't seem so to us. 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 example, we've discovered 1 warning sign for Gold Road Resources that you should be aware of before investing here.
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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