Warren Buffett said: “Volatility is far from synonymous with risk”. So it can be obvious that you need to consider debt, when you think about how risky a given stock is because too much debt can sink a business. We notice that OceanaGold Company (TSE: OGC) has debt on its balance sheet. But should shareholders be concerned about its use of debt?
When Is Debt a Problem?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still painful) scenario is that he must raise new equity at low cost, thereby diluting shareholders over the long term. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we think of a business’s use of debt, we first look at cash flow and debt together.
Discover our latest analysis for OceanaGold
What is OceanaGold’s debt?
The graph below, which you can click for more details, shows that OceanaGold had $ 206.5 million in debt as of March 2021; about the same as the year before. On the other hand, it has $ 145.5 million in cash, resulting in net debt of around $ 61.0 million.
How healthy is OceanaGold’s balance sheet?
The latest balance sheet data shows that OceanaGold had debts of $ 237.2 million due within one year, and debts of $ 432.8 million due thereafter. In compensation for these obligations, he had cash of US $ 145.5 million as well as receivables valued at US $ 7.70 million maturing within 12 months. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by $ 516.8 million.
This deficit is not that big of a deal as OceanaGold is worth $ 1.32 billion, and therefore could possibly raise enough capital to consolidate its balance sheet, should the need arise. However, it is always worth taking a close look at your ability to repay debts. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether OceanaGold can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Over the past year, OceanaGold recorded a loss before interest and taxes and actually reduced its revenue by 16%, to $ 511 million. We would much prefer to see the growth.
While OceanaGold’s decline in revenue is about as comforting as a wet blanket, arguably, its earnings before interest and taxes (EBIT) are even less attractive. To be precise, the EBIT loss amounted to US $ 96 million. When we look at this and recall the liabilities on its balance sheet, versus the cash flow, it seems unwise to us that the company has debt. We therefore believe that its record is a bit strained, but not irreparable. Another reason to be cautious is that it has lost $ 143 million in negative free cash flow over the past twelve months. Suffice it to say, then, that we consider the stock to be very risky. The balance sheet is clearly the area you need to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. For example, we discovered 1 warning sign for OceanaGold which you should know before investing here.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.
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