Yahoo Finance Is NovaGold Resources (TSE:NG) Using Debt In A Risky Way?
The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, NovaGold Resources Inc. (TSE:NG) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.
View our latest analysis for NovaGold Resources
What Is NovaGold Resources's Net Debt?
The image below, which you can click on for greater detail, shows that at August 2021 NovaGold Resources had debt of US$114.2m, up from US$108.4m in one year. However, its balance sheet shows it holds US$173.3m in cash, so it actually has US$59.1m net cash.
How Healthy Is NovaGold Resources' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that NovaGold Resources had liabilities of US$2.80m due within 12 months and liabilities of US$114.5m due beyond that. On the other hand, it had cash of US$173.3m and US$45.0k worth of receivables due within a year. So it actually has US$56.1m more liquid assets than total liabilities.
This short term liquidity is a sign that NovaGold Resources could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, NovaGold Resources boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if NovaGold Resources can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Since NovaGold Resources has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.
So How Risky Is NovaGold Resources?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year NovaGold Resources had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$11m and booked a US$37m accounting loss. But the saving grace is the US$59.1m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. Be aware that NovaGold Resources is showing 2 warning signs in our investment analysis , and 1 of those is potentially serious...
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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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