Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Sabina Gold & Silver Corp. (TSE:SBB) does carry debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Sabina Gold & Silver's Net Debt?
The image below, which you can click on for greater detail, shows that at March 2022 Sabina Gold & Silver had debt of CA$37.5m, up from none in one year. However, it does have CA$221.4m in cash offsetting this, leading to net cash of CA$183.9m.
How Healthy Is Sabina Gold & Silver's Balance Sheet?
We can see from the most recent balance sheet that Sabina Gold & Silver had liabilities of CA$53.8m falling due within a year, and liabilities of CA$51.9m due beyond that. Offsetting this, it had CA$221.4m in cash and CA$1.65m in receivables that were due within 12 months. So it actually has CA$117.3m more liquid assets than total liabilities.
It's good to see that Sabina Gold & Silver has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Sabina Gold & Silver has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Sabina Gold & Silver's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Given its lack of meaningful operating revenue, investors are probably hoping that Sabina Gold & Silver finds some valuable resources, before it runs out of money.
So How Risky Is Sabina Gold & Silver?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Sabina Gold & Silver lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CA$99m of cash and made a loss of CA$12m. Given it only has net cash of CA$183.9m, the company may need to raise more capital if it doesn't reach break-even soon. 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 Sabina Gold & Silver is showing 5 warning signs in our investment analysis , and 3 of those are a bit unpleasant...
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.