Would Orezone Gold (TSE:ORE) be better off with less debt?
Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. We note that Orezone Gold Corporation (TSE:ORE) has debt on its balance sheet. But should shareholders worry about its use of debt?
When is debt dangerous?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. Of course, many companies use debt to finance their growth, without any negative consequences. The first thing to do when considering how much debt a business has is to look at its cash and debt together.
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What is Orezone Gold’s debt?
The image below, which you can click on for more details, shows that in June 2022, Orezone Gold had $97.2 million in debt, up from none in a year. However, he has $23.6 million in cash to offset this, resulting in a net debt of approximately $73.6 million.
A Look at Orezone Gold’s Passives
Zooming in on the latest balance sheet data, we can see that Orezone Gold had liabilities of US$40.6 million due within 12 months and liabilities of US$114.9 million due beyond. On the other hand, it had liquidities of 23.6 million dollars and 313.4 k$ of receivables due within one year. Thus, its liabilities total $131.6 million more than the combination of its cash and short-term receivables.
While that might sound like a lot, it’s not that bad since Orezone Gold has a market capitalization of US$266.5 million, so it could likely bolster its balance sheet by raising capital if needed. But it is clear that it is essential to examine closely whether it can manage its debt without dilution. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Orezone Gold can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
Given that Orezone Gold has no significant operating revenue, shareholders are likely hoping it will develop a new mine of value before too long.
Importantly, Orezone Gold posted a loss in earnings before interest and taxes (EBIT) over the past year. To be precise, the EBIT loss amounted to 10 million US dollars. Considering that alongside the liabilities mentioned above, this doesn’t give us much confidence that the company should use so much debt. Quite frankly, we think the track record falls short, although it could improve over time. Another reason for caution is that it has lost $132 million in negative free cash flow over the past twelve months. In short, it’s a really risky title. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example, we have identified 2 warning signs for Orezone Gold (1 is potentially serious) of which you should be aware.
If you are interested in investing in companies that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.