Does Goldplat (LON:GDP) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Goldplat PLC (LON:GDP) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Goldplat

What Is Goldplat's Net Debt?

The image below, which you can click on for greater detail, shows that Goldplat had debt of UK£1.21m at the end of December 2020, a reduction from UK£1.48m over a year. But on the other hand it also has UK£1.39m in cash, leading to a UK£187.0k net cash position.

How Healthy Is Goldplat's Balance Sheet?

The latest balance sheet data shows that Goldplat had liabilities of UK£14.1m due within a year, and liabilities of UK£1.39m falling due after that. On the other hand, it had cash of UK£1.39m and UK£6.58m worth of receivables due within a year. So it has liabilities totalling UK£7.53m more than its cash and near-term receivables, combined.

Goldplat has a market capitalization of UK£13.2m, 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, Goldplat also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also positive, Goldplat grew its EBIT by 24% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Goldplat 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Goldplat 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, Goldplat's free cash flow amounted to 28% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

Although Goldplat's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of UK£187.0k. And we liked the look of last year's 24% year-on-year EBIT growth. So we don't have any problem with Goldplat's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Goldplat you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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