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Is Seabridge Gold (TSE:SEA) Weighed On By Its Debt Load?

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Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Seabridge Gold Inc. (TSE:SEA) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Seabridge Gold

What Is Seabridge Gold's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2022 Seabridge Gold had debt of CA$281.2m, up from none in one year. However, it does have CA$299.4m in cash offsetting this, leading to net cash of CA$18.2m.

debt-equity-history-analysis
debt-equity-history-analysis

How Healthy Is Seabridge Gold's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Seabridge Gold had liabilities of CA$14.2m due within 12 months and liabilities of CA$307.5m due beyond that. Offsetting this, it had CA$299.4m in cash and CA$9.02m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$13.3m.

Having regard to Seabridge Gold's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CA$1.45b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Seabridge Gold 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 it is future earnings, more than anything, that will determine Seabridge Gold's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Given its lack of meaningful operating revenue, investors are probably hoping that Seabridge Gold finds some valuable resources, before it runs out of money.

So How Risky Is Seabridge Gold?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Seabridge Gold lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CA$93m of cash and made a loss of CA$1.1m. Given it only has net cash of CA$18.2m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 4 warning signs with Seabridge Gold (at least 1 which is a bit unpleasant) , and understanding them should be part of your investment process.

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.

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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.

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