Is Dacian Gold (ASX:DCN) weighed down by its debt?
Warren Buffett said: “Volatility is far from synonymous with risk. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Above all, Dacian Gold Limited (ASX:DCN) is in debt. But should shareholders worry about its use of debt?
When is debt dangerous?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. In the worst case, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we look at debt levels, we first consider cash and debt levels, together.
See our latest analysis for Dacian Gold
What is Dacian Gold’s debt?
You can click on the chart below for historical figures, but it shows Dacian Gold had A$17.4 million in debt in December 2021, up from A$24.6 million a year earlier. However, his balance sheet shows he is holding A$26.9 million in cash, so he actually has A$9.56 million in net cash.
How strong is Dacian Gold’s balance sheet?
The latest balance sheet data shows that Dacian Gold had liabilities of A$51.0 million due within one year, and liabilities of A$36.9 million falling due thereafter. On the other hand, it had cash of A$26.9 million and A$4.41 million of receivables due within a year. Thus, its liabilities outweigh the sum of its cash and (current) receivables of A$56.5 million.
Given that Dacian Gold has a market capitalization of A$287.5 million, it’s hard to believe that these liabilities pose a big threat. However, we think it’s worth keeping an eye on the strength of its balance sheet, as it can change over time. While he has liabilities worth noting, Dacian Gold also has more cash than debt, so we’re pretty confident he can manage his debt safely. There is no doubt that we learn the most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Dacian Gold’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
Over 12 months, Dacian Gold recorded a loss in EBIT and saw its turnover fall to 186 million Australian dollars, a decline of 29%. It makes us nervous, to say the least.
So how risky is Dacian Gold?
By their very nature, companies that lose money are riskier than those with a long history of profitability. And the fact is that over the past twelve months, Dacian Gold has been losing money in Earnings Before Interest and Taxes (EBIT). Indeed, during this period, he spent A$50 million in cash and suffered a loss of A$64 million. While this makes the business a bit risky, it’s important to remember that it has a net cash position of A$9.56 million. That means it could continue spending at its current rate for more than two years. Overall, we would say the stock is a bit risky and we are generally very cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist outside of the balance sheet. Know that Dacian Gold shows 3 warning signs in our investment analysis and 1 of them is potentially serious…
If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-neutral growth stocks right away.
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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.