In the gold mining sector there are many companies to choose from. One of the leaders in this sector and a company worth considering is Goldcorp Incorporated (NYSE:GG). While there are many different factors to look at and consider when investing, in the article below I will look at the debt side of the company. I will analyze Goldcorp's total debt, total liabilities, debt ratios and WACC. From this analysis we should get an idea if the company is highly leveraged, how much it is paying for its debt, what it's paying in taxes and how much to expect in return for investing in this company over the long-term.

Gaining knowledge about a company's debt and liabilities is a key component in understanding the risk of a company. In 2008 and 2009 we were able to see some of the repercussions that highly leveraged companies with large amounts of debt succumbed to. Taking into account the debt side of a company might not reveal the "pop" on the upside that an investor would like, but it will help ensure that the company is able to keep its capital and use it for growth in the future.

All material is sourced from Google Finance, Morningstar and Goldcorp's webpage.

*1. Total Debt = Long-Term Debt + Short-Term Debt*

Total debt is the sum of long-term debt, which is debt that is due in one year or more, and short-term debt, which is any debt due within one year.

- 2008 - $5 million + $0 million = $5 million
- 2009 - $719 million + $0 million = $719 million
- 2010 - $747 million + $17 million = $764 million
- 2011 - $737 million + $0 million = $737 million
- 2012 TTM - $771 million + $0 billion = $771 million

Goldcorp's total debt has increased since 2009. In 2009, the company reported a total debt of $719 million. In 2012 TTM (trailing twelve months), the company's total debt increased to $771 million. This indicates a very minimal increase in total debt over the past 4 years. Over the past 4 years, Goldcorp's total debt has increased by 7.23%.

*2. Total Liabilities*

Liabilities are a company's legal debts or obligations that arise during the course of business operations, so debts are one type of liability, but not all liabilities. Total liabilities is the combination of long-term liabilities, which are the liabilities that are due in one year or more, and short-term or current liabilities, which are any liabilities due within one year.

- 2008 - $4.050 billion
- 2009 - $5.456 billion
- 2010 - $8.615 billion
- 2011 - $8.102 billion
- 2012 TTM - $8.320 billion

Goldcorp's liabilities have also increased over the past 5 years. In 2008, the company reported liabilities at $4.050 billion; in 2012 TTM, the company reported liabilities at $8.320 billion. Over the past 5 years, Goldcorp's liabilities have increased by 105.43%.

In analyzing Goldcorp's total debt and liabilities, we can see that the company currently has a total debt of $771 million and liabilities at $8.320 billion. Goldcorp's total debt has increased by 7.23% while total liabilities have increased by 105.43%. As the company's amount of debt and amount of liabilities have increased over the past 5 years, the next step will reveal if the company has the ability to pay them.

## Debt Ratios

*3. Total Debt to Total Assets Ratio = Total Debt / Total Assets*

This is a metric used to measure a company's financial risk by determining how much of the company's assets have been financed by debt. It is calculated by adding short-term and long-term debt and then dividing by the company's total assets.

A debt ratio of greater than 1 indicates that a company has more total debt than assets; meanwhile, a debt ratio of less than 1 indicates that a company has more assets than total debt. Used along with other measures of financial health, the total debt to total assets ratio can help investors determine a company's level of risk.

- 2010 - $764 million / $28.809 billion = 0.03
- 2011 - $737 million / $29.374 billion = 0.03
- 2012 TTM - $771 million / $30.622 billion = 0.03

Goldcorp's total debt to total assets ratio has remained the same. Over the past three years, the total debt to total assets ratio has remained steady at 0.03. This indicates that since 2010, the company has been adding asset value at the same pace as its total debt. As the number is currently well below 1, this indicates that the company has more assets than total debt. Because this number is extremely low, this metric indicates very low financial risk to the company.

*4. Debt ratio = Total Liabilities / Total Assets*

Total liabilities divided by total assets. The debt ratio shows the proportion of a company's assets that is financed through debt. If the ratio is less than 0.5, most of the company's assets are financed through equity. If the ratio is greater than 0.5, most of the company's assets are financed through debt. Companies with high debt/asset ratios are said to be "highly leveraged." A company with a high-debt ratio or that is "highly leveraged" could be in danger if creditors start to demand repayment of debt.

- 2010 - $8.615 billion / $28.809 billion = 0.30
- 2011 - $8.102 billion / $29.374 billion = 0.28
- 2012 TTM - $8.320 billion / $30.622 billion = 0.27

In looking at Goldcorp's total liabilities to total assets ratio over the past three years, we can see that this ratio has decreased. The ratio has decreased from 0.30 in 2010 to 0.27 in 2012 TTM. As the 2012 TTM numbers are below the 0.50 mark, this indicates that Goldcorp has not financed most of the company's assets through debt. As the number has decreased, so is the risk to the company.

*5. Debt-to-Equity Ratio = Total Liabilities / Shareholders' Equity*

The debt-to-equity ratio is another leverage ratio that compares a company's total liabilities with its total shareholders' equity. This is a measurement of how much suppliers, lenders, creditors and obligators have committed to the company versus what the shareholders have committed.

A high debt-to-equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in the company reporting volatile earnings. In general, a high debt-to-equity ratio indicates that a company may not be able to generate enough cash to satisfy its debt obligations, and therefore is considered a riskier investment.

- 2010 - $8.615 billion / $20.194 billion = 0.43
- 2011 - $8.102 billion / $21.272 billion = 0.38
- 2012 TTM - $8.320 billion / $22.302 billion = 0.37

Compared to 2010, Goldcorp's debt-to-equity ratio has decreased. The ratio has decreased from 0.43 to 0.37. As the ratio is currently below 1, this indicates that shareholders have invested more than suppliers, lenders, creditors and obligators. 0.37 indicates a low amount of risk for the company. As the ratio is below 1 and considered low, so is the risk for the company.

*6. Capitalization Ratio = LT Debt / LT Debt + Shareholders' Equity*

(LT Debt = Long-Term Debt)

The capitalization ratio tells the investors the extent to which the company is using its equity to support operations and growth. This ratio helps in the assessment of risk. Companies with a high capitalization ratio are considered to be risky because they are at a risk of insolvency if they fail to repay their debt on time. Companies with a high capitalization ratio may also find it difficult to get more loans in the future.

- 2010 - $764 million / $20.958 billion = 0.04
- 2011 - $737 million / $22.009 billion = 0.03
- 2012 TTM - $771 million / $23.073 billion = 0.03

Over the past three years, Goldcorp's capitalization ratio has decreased from 0.04 to 0.03. This implies that the company has less equity compared with its long-term debt. As this is the case, the company has had less equity to support its operations and add growth through its equity. As the ratio is decreasing, financially this implies a slight increase of risk to the company but as the ratio is only 0.03 this implies extremely low financial risk.

*7. Cash Flow to Total Debt Ratio = Operating Cash Flow / Total Debt*

This coverage ratio compares a company's operating cash flow with its total debt. This ratio provides an indication of a company's ability to cover total debt with its yearly cash flow from operations. The higher the percentage ratio, the better the company's ability to carry its total debt. The larger the ratio, the better a company can weather rough economic conditions.

- 2010 - $1.772 billion / $764 million = 2.32
- 2011 - $2.366 billion / $737 million = 3.21
- 2012 TTM - $2.037 billion / $771 million = 2.64

Over the past three years, the cash flow to total debt ratio has increased. The ratio has decreased from 2.32 in 2010 to 2.64 in 2012 TTM. As the ratio is well above 1, this implies that the company has the ability to cover its total debt with its yearly cash flow from operations.

Based on the five debt ratios listed above, we can see that Goldcorp has very little financial risk based on its debt and liabilities. The above ratios also show that there has been very little change in the company's debt to liabilities compared to its assets. As the price of gold looks to be strong in 2013, the company should be able to make money on the assets and not be burdened by massive amounts of debt and debt obligations. The next step will reveal how much the company will pay for the debt incurred.

## Cost of Debt

The cost of debt is the effective rate that a company pays on its total debt.

As a company acquires debt through various bonds, loans and other forms of debt, the cost of debt is a useful metric. It gives an idea as to the overall rate being paid by the company to use debt financing.

This measure is also useful because it gives investors an idea as to the riskiness of the company compared with others. The higher the cost of debt, the higher the risk.

*8. Cost of debt (before tax) = Corporate Bond rate of company's bond rating.*

- S&P rated Goldcorp's bonds "BBB+"
- Goldcorp Inc New 144A Cv 2% Rate of "BBB+" = 2.00%
- Current cost of Debt as of January February 8th 2013 = 2.00%

According to the S&P rating guide, the "BBB+" rating is "Adequate capacity to meet financial commitments, but more subject to adverse economic conditions." Goldcorp has a rating that meets this description.

*9. Current tax rate (Income Tax Total / Income Before Tax)*

- 2008 - $295 million / $1.779 billion = 16.58%
- 2009 - $207 million / $447 million = 46.31%
- 2010 - $346 million / $1.727 billion = 20.03%
- 2011 - $686 million / $2.567 billion = 26.72%
- 2012 TTM - $503 million / $2.153 billion = 23.36%

2008 - 2012 TTM 5-year average = 21.67%

From 2008 - 2012 TTM subtracting 2009, Goldcorp has averaged tax rate of 21.67%.

*10. Cost of Debt (After Tax) = (Cost of Debt Before Tax) (1 - Tax Rate)*

The effective rate that a company pays on its current debt after tax.

- .02 x (1 - .2167) = Cost of debt after tax

The cost of debt after tax for Goldcorp is *1.57%*

**Cost of Equity or R Equity =** Risk Free Rate + Beta Equity (Average Market Return - Risk Free Rate)

The cost of equity is the return a firm theoretically pays to its equity investors (for example, shareholders) to compensate for the risk they undertake by investing in their company.

- Risk Free Rate = U.S. 10-year bond = 1.95% (Bloomberg)
- Average Market Return 1950 - 2012 = 7%
- Beta = (Google Finance) Goldcorp's Beta = 0.54

Risk Free Rate + Beta Equity (Average Market Return - Risk Free Rate)

- 1.95 + 0.54 (7-1.95)
- 1.95 + 0.54 x 5.05
- 1.95 + 2.73 = 4.68%

Currently, Goldcorp has a Cost of Equity or R Equity of 4.68%, so investors should expect to get a return of 4.68% per-year average over the long term on their investment to compensate for the risk they undertake by investing in this company.

(*Please note that this is the CAPM approach to finding the cost of equity. Inherently, there are some flaws with this approach and that the numbers are very "general." This approach is based off of the S&P average return from 1950 - 2012 at 7%, the U.S. 10-year bond for the risk-free rate which is susceptible to daily change and Google finance beta.*)

## Weighted Average Cost of Capital or WACC

The WACC calculation is a calculation of a company's cost of capital in which each category of capital is equally weighted. All capital sources such as common stock, preferred stock, bonds and all other long-term debt are included in this calculation.

As the WACC of a firm increases, and the beta and rate of return on equity increases, this is an indicator of a decrease in valuation and a higher risk.

By taking the weighted average, we can see how much interest the company has to pay for every dollar it finances.

For this calculation, you will need to know the following listed below:

Tax Rate = 21.67% (Goldcorp's five-year average Tax Rate)

Cost of Debt (before tax) or **R debt** = 2.0%

Cost of Equity or **R equity** = 4.68%

Debt (Total Liabilities) for 2012 TTM or **D** = $8.320 billion

Stock Price = $36.07 (February 8th, 2013)

Outstanding Shares = 811.00 million

Equity = Stock price x Outstanding Shares or **E** = $29.252 billion

Debt + Equity or **D+E** = $37.572 billion

**WACC** = R = (1 - Tax Rate) x R debt (D/D+E) + R equity (E/D+E)

(1 - Tax Rate) x R debt (D/D+E) + R equity (E/D+E)

(1 - .2167) x .02 x ($8.320/$37.572) + .0468 ($29.252/$37.572)

.7833 x .02 x .2214 + .0468 x .7786

.0035 + .0364

= 3.99%

Based on the calculations above, we can conclude that Goldcorp pays 3.99% on every dollar that it finances, or 3.99 cents on every dollar. From this calculation, we understand that on every dollar the company spends on an investment, the company must make $.0399 plus the cost of the investment for the investment to be feasible for the company.

## Debt Side Summary

All indications above reveal that Goldcorp Inc. is a financially stable company on the debt side. The Bond rating of "BBB+" indicates the company has an "Adequate capacity to meet financial commitments, but more subject to adverse economic conditions." My analysis also indicates a very slight amount of risk to the shareholder from a debt point of view, while the CAPM supports this by revealing that the investor needs 4.68% year-over-year over the long term to get good value on their money.

As the debt side of the company is only one aspect of the company to be aware of, an excellent article on other aspects of the company is: 3 Reasons To Consider Goldcorp Now.

## Analysts Outlook

Currently, many analysts have a positive outlook for Goldcorp. Over the next five years analysts at MSN Money are estimating an average of 13.10% growth in earnings year over year, which is significantly above the industry average of 8.40%. On February 4th, the analysts at Barclays gave Goldcorp a rating of "Overweight" with a target price of $49.00. A $49.00 price target signifies an upside of 35.70% from this point.

## Summary

The above analysis reveals that Goldcorp Incorporated is a very financially stable company on the debt side with significant upside looking forward. The analysis indicates that the company can support its total debt and liabilities without distress to the company. It also states that there is significant upside, as analysts currently have a $49.00 price target on this stock. As the chart below indicates, this is excellent opportunity to invest in a financially stable gold mining company with significant upside on current weakness.

Chart sourced by Finviz

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