Yahoo Finance We Think Elevation Gold Mining (CVE:ELVT) Can Stay On Top Of Its Debt
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Elevation Gold Mining Corporation (CVE:ELVT) does use debt in its business. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Elevation Gold Mining
How Much Debt Does Elevation Gold Mining Carry?
The image below, which you can click on for greater detail, shows that Elevation Gold Mining had debt of US$6.06m at the end of June 2021, a reduction from US$16.6m over a year. But it also has US$6.89m in cash to offset that, meaning it has US$833.0k net cash.
A Look At Elevation Gold Mining's Liabilities
We can see from the most recent balance sheet that Elevation Gold Mining had liabilities of US$22.5m falling due within a year, and liabilities of US$38.0m due beyond that. Offsetting these obligations, it had cash of US$6.89m as well as receivables valued at US$337.0k due within 12 months. So its liabilities total US$53.2m more than the combination of its cash and short-term receivables.
This is a mountain of leverage relative to its market capitalization of US$64.0m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, Elevation Gold Mining also has more cash than debt, so we're pretty confident it can manage its debt safely.
Even more impressive was the fact that Elevation Gold Mining grew its EBIT by 401% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Elevation Gold Mining 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Elevation Gold Mining may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last two years, Elevation Gold Mining reported free cash flow worth 2.8% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.
Summing up
While Elevation Gold Mining does have more liabilities than liquid assets, it also has net cash of US$833.0k. And we liked the look of last year's 401% year-on-year EBIT growth. So we don't have any problem with Elevation Gold Mining's use of debt. 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 Elevation Gold Mining is showing 4 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...
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.
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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