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. So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies China Nonferrous Gold Limited (LON:CNG) makes use of debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for China Nonferrous Gold
How Much Debt Does China Nonferrous Gold Carry?
As you can see below, at the end of December 2018, China Nonferrous Gold had US$345.0m of debt, up from US$279.2m a year ago. Click the image for more detail. However, it does have US$8.36m in cash offsetting this, leading to net debt of about US$336.6m.
How Strong Is China Nonferrous Gold's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that China Nonferrous Gold had liabilities of US$244.9m due within 12 months and liabilities of US$183.1m due beyond that. Offsetting this, it had US$8.36m in cash and US$244.3k in receivables that were due within 12 months. So its liabilities total US$419.4m more than the combination of its cash and short-term receivables.
The deficiency here weighs heavily on the US$100.2m 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. After all, China Nonferrous Gold would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is China Nonferrous Gold's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.