Yahoo Finance We Think GCM Mining (TSE:GCM) Can Stay On Top Of Its Debt
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies GCM Mining Corp. (TSE:GCM) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for GCM Mining
What Is GCM Mining's Net Debt?
The image below, which you can click on for greater detail, shows that at September 2021 GCM Mining had debt of US$307.7m, up from US$63.4m in one year. However, its balance sheet shows it holds US$329.6m in cash, so it actually has US$21.9m net cash.
How Strong Is GCM Mining's Balance Sheet?
We can see from the most recent balance sheet that GCM Mining had liabilities of US$43.7m falling due within a year, and liabilities of US$454.7m due beyond that. On the other hand, it had cash of US$329.6m and US$22.3m worth of receivables due within a year. So it has liabilities totalling US$146.5m more than its cash and near-term receivables, combined.
GCM Mining has a market capitalization of US$420.2m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, GCM Mining also has more cash than debt, so we're pretty confident it can manage its debt safely.
Although GCM Mining made a loss at the EBIT level, last year, it was also good to see that it generated US$144m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if GCM Mining can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. GCM Mining 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. In the last year, GCM Mining created free cash flow amounting to 19% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.
Summing up
While GCM Mining does have more liabilities than liquid assets, it also has net cash of US$21.9m. So we are not troubled with GCM Mining's debt use. 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. For example, we've discovered 4 warning signs for GCM Mining (3 are a bit unpleasant!) that you should be aware of before investing here.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.
