TSE:BTO) does use debt in its business. But the real question is whether this debt is making the company risky.” data-reactid=”28″>Howard Marks put it nicely when he said that, rather than worrying about share price volatility, ‘The possibility of permanent loss is the risk I worry about… and every practical investor I know worries about.’ When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that B2Gold Corp. (TSE:BTO) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. When we think about a company’s use of debt, we first look at cash and debt together.
View our latest analysis for B2Gold ” data-reactid=”31″> View our latest analysis for B2Gold
How Much Debt Does B2Gold Carry?
The image below, which you can click on for greater detail, shows that at June 2020 B2Gold had debt of US$462.8m, up from US$438.3m in one year. But on the other hand it also has US$627.7m in cash, leading to a US$164.9m net cash position.
How Healthy Is B2Gold’s Balance Sheet?
We can see from the most recent balance sheet that B2Gold had liabilities of US$266.2m falling due within a year, and liabilities of US$702.9m due beyond that. Offsetting these obligations, it had cash of US$627.7m as well as receivables valued at US$34.0m due within 12 months. So it has liabilities totalling US$307.5m more than its cash and near-term receivables, combined.
Since publicly traded B2Gold shares are worth a total of US$6.82b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it’s clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, B2Gold boasts net cash, so it’s fair to say it does not have a heavy debt load!
report showing analyst profit forecasts.” data-reactid=”53″>Even more impressive was the fact that B2Gold grew its EBIT by 168% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine B2Gold’s ability to maintain a healthy balance sheet going forward. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. B2Gold may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, B2Gold recorded free cash flow worth 60% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.
Summing up
4 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.” data-reactid=”56″>While it is always sensible to look at a company’s total liabilities, it is very reassuring that B2Gold has US$164.9m in net cash. And it impressed us with its EBIT growth of 168% over the last year. So we don’t think B2Gold’s use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet – far from it. Take risks, for example – B2Gold has 4 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.
our list of net cash growth stocks without delay.” data-reactid=”61″>If, after all that, you’re more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
Get in touch with us directly. Alternatively, email [email protected].” data-reactid=”62″>This article by Simply Wall St is general in nature. 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.
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