In This Article:
Warren Buffett famously said, '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. As with many other companies China Gold International Resources Corp. Ltd. (TSE:CGG) makes use of debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for China Gold International Resources
What Is China Gold International Resources's Net Debt?
The chart below, which you can click on for greater detail, shows that China Gold International Resources had US$1.26b in debt in June 2019; about the same as the year before. However, it does have US$175.2m in cash offsetting this, leading to net debt of about US$1.08b.
A Look At China Gold International Resources's Liabilities
According to the last reported balance sheet, China Gold International Resources had liabilities of US$410.3m due within 12 months, and liabilities of US$1.34b due beyond 12 months. Offsetting these obligations, it had cash of US$175.2m as well as receivables valued at US$27.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$1.54b.
The deficiency here weighs heavily on the US$361.7m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet." So we definitely think shareholders need to watch this one closely. At the end of the day, China Gold International Resources would probably need a major re-capitalization if its creditors were to demand repayment.
We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.