David Iben put it well when he said, ‘Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.’ It’s only natural to consider a company’s balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Kinross Gold Corporation (TSE:K) does use debt in its business. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst-case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Debt can be an important tool in businesses, particularly capital-heavy ones. When examining debt levels, it’s crucial to consider both cash and debt levels together.
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How Much Debt Does Kinross Gold Carry?
The image below, which you can click on for greater detail, shows that Kinross Gold had debt of US$2.23b at the end of March 2024, a reduction from US$2.69b the previous year. However, it also had US$423.3m in cash, so its net debt is US$1.81b.
How Healthy Is Kinross Gold’s Balance Sheet?
The latest balance sheet data shows that Kinross Gold had liabilities of US$1.59b due within a year, and liabilities of US$2.69b falling due after that. Offsetting this, it had US$423.3m in cash and US$150.9m in receivables due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$3.71b.
Despite the relatively high debt level, Kinross Gold’s market capitalization of US$9.82b suggests it could strengthen its balance sheet by raising capital if necessary. It’s important to assess its ability to pay off debt, which is typically done by comparing net debt to EBITDA and analyzing the interest cover ratio.
Kinross Gold has a low net debt to EBITDA ratio of only 0.96, indicating a conservative use of debt. Its EBIT covers its interest expense 30.2 times over, showing strong financial health. Additionally, the company’s significant EBIT growth of 111% last year further supports its ability to manage and reduce debt going forward.
Analyzing Future Earnings for Financial Stability
Future earnings will ultimately determine Kinross Gold’s capability to maintain a healthy balance sheet. While the current financial metrics are favorable, it’s essential to monitor the company’s growth and profit forecasts to ensure continued stability. The ability to generate free cash flow and reduce debt when needed is a crucial factor in long-term financial sustainability.
Our View
Kinross Gold’s strong interest cover and EBIT growth indicate a sound management of debt obligations and financial health. By using debt reasonably and effectively, the company can potentially achieve a higher return on equity. While debt poses risks, when managed wisely, it can contribute to financial strength and growth. It’s important to consider all aspects of investment risk, including debt levels and future earnings potential.
At the end of the day, focusing on companies with minimal net debt can provide added security in uncertain market conditions.
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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.
