We Think Globe International (ASX:GLB) Can Manage Its Debt With Ease

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Globe International Limited (ASX:GLB) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Globe International

What Is Globe International's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Globe International had AU$7.55m of debt in June 2024, down from AU$10.9m, one year before. However, it does have AU$22.1m in cash offsetting this, leading to net cash of AU$14.6m.

A Look At Globe International's Liabilities

The latest balance sheet data shows that Globe International had liabilities of AU$35.1m due within a year, and liabilities of AU$16.5m falling due after that. Offsetting this, it had AU$22.1m in cash and AU$31.3m in receivables that were due within 12 months. So it can boast AU$1.78m more liquid assets than total liabilities.

This state of affairs indicates that Globe International's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the AU$150.9m company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Globe International boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Globe International grew its EBIT by 274% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Globe International will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Globe International 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 three years, Globe International's free cash flow amounted to 44% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Globe International has net cash of AU$14.6m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 274% over the last year. So is Globe International's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Globe International (1 is concerning!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.