While financial leverage is important in gauging a company’s long-term solvency, short-term liquidity profiles are also important. In a weaker commodity price environment, short-term liquidity might come under more pressure. A company could be forced to take drastic measures.
The current ratio is one way to estimate a company’s liquidity. The above graph shows gold miners’ current ratios, which show a company’s ability to pay its short-term obligations using short-term assets.
The higher the ratio, the better the company can service its short-term liabilities, and vice versa. Kinross Gold (KGC) and Newmont Mining (NEM) are doing the best in this parameter. Yamana Gold (AUY) is doing the worst. Unlike its leverage, Barrick Gold’s (ABX) liquidity is comfortable with a ratio of 2.8x.
Net debt to EBITDA
Having high debt isn’t always bad if a company has the capacity to pay it back with its earnings. The net-debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) ratio tells how many years it will take for a company to repay its debt if net debt and EBITDA stay constant. Net debt is calculated as total debt minus cash and cash equivalents.
Yamana’s net-debt-to-forward EBITDA ratio is 1.6x. This is higher than the ratio of its peers, as you can see in the above graph. Barrick and Goldcorp (GG) have net-debt-to-forward EBITDA ratios of 1.5x and 1.3x, respectively.
Combined, Newmont Mining and Barrick Gold form 13% of the VanEck Vectors Gold Miners ETF (GDX). Investors can access the gold industry by investing in gold-backed ETFs such as the SPDR Gold Shares (GLD). Leveraged ETFs such as the ProShares Ultra Silver (AGQ) and the Direxion Daily Gold Miners Bull 3X ETF (NUGT) provide high leverage to changes in precious metals prices.
Next, let’s see which gold miners can provide free cash flow upsides in 2016.