Here’s why OceanaGold (TSE:OGC) can get into debt

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Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The greatest 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. Above all, OceanaGold Corporation (EAST: OGC) is in debt. 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. In the worst case, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. When we look at debt levels, we first consider cash and debt levels, together.

See our latest analysis for OceanaGold

What is OceanaGold’s debt?

The image below, which you can click on for more details, shows that as of December 2020, OceanaGold had $206.7 million in debt, up from $149.5 million in one year. On the other hand, he has $179.0 million in cash, resulting in a net debt of around $27.7 million.

TSX:OGC Debt to Equity History March 7, 2021

How strong is OceanaGold’s balance sheet?

According to the last published balance sheet, OceanaGold had liabilities of US$266.3 million due within 12 months and liabilities of US$422.1 million due beyond 12 months. In return, he had $179.0 million in cash and $7.50 million in receivables due within 12 months. It therefore has liabilities totaling $501.9 million more than its cash and short-term receivables, combined.

While that might sound like a lot, it’s not that bad since OceanaGold has a market capitalization of US$998.5 million, so it could likely bolster its balance sheet by raising capital if needed. But we definitely want to keep our eyes peeled for indications that its debt is too risky. 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 OceanaGold can strengthen its balance sheet over time. So if you want to see what the pros think, you might find this free analyst earnings forecast report Be interesting.

Over 12 months, OceanaGold recorded a loss in EBIT, and saw its turnover fall to US$500 million, a decline of 23%. To be honest, that doesn’t bode well.

Caveat Emptor

While OceanaGold’s declining earnings are about as comforting as a wet blanket, its earnings before interest and taxes (EBIT) are arguably even less appealing. Indeed, it lost a very significant US$129 million in EBIT. When we look at this and recall the liabilities on its balance sheet, versus cash, it seems unwise to us that the company has liabilities. Quite frankly, we think the track record falls short, although it could improve over time. Another reason for caution is that it has lost $55 million in negative free cash flow over the past twelve months. So suffice it to say that we consider the stock to be very risky. 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. For example, we have identified 2 warning signs for OceanaGold of which you should be aware.

Of course, if you are the type of investor who prefers to buy stocks without going into debt, do not hesitate to discover our exclusive list of net cash growth stockstoday.

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