Warren Buffett famously said, ‘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. We can see that Seabridge Gold Inc. (TSE:SEA) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. 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, 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.
What Is Seabridge Gold’s Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2023 Seabridge Gold had CA$488.7m of debt, an increase on CA$220.7m, over one year. However, it also had CA$132.6m in cash, and so its net debt is CA$356.1m.
How Strong Is Seabridge Gold’s Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Seabridge Gold had liabilities of CA$63.8m due within 12 months and liabilities of CA$527.4m due beyond that. On the other hand, it had cash of CA$132.6m and CA$6.65m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$451.9m.
This deficit isn’t so bad because Seabridge Gold is worth CA$1.23b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it’s clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can’t view debt in total isolation; since Seabridge Gold will need earnings to service that debt. 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.
Given its lack of meaningful operating revenue, investors are probably hoping that Seabridge Gold finds some valuable resources, before it runs out of money.
Over the last twelve months Seabridge Gold produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CA$24m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn’t help that it burned through CA$260m of cash over the last year. So suffice it to say we consider the stock very risky. 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. Case in point: We’ve spotted 3 warning signs for Seabridge Gold you should be aware of, and 2 of them shouldn’t be ignored.
When all is said and done, sometimes its easier to focus on companies that don’t even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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Find out whether Seabridge Gold is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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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.