We Think Goldplat (LON:GDP) Can Stay On Top Of Its Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. As with many other companies Goldplat PLC (LON:GDP) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Goldplat

What Is Goldplat's 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. However, its balance sheet shows it holds UK£1.39m in cash, so it actually has UK£187.0k net cash.

A Look At Goldplat's Liabilities

We can see from the most recent balance sheet that Goldplat had liabilities of UK£14.1m falling due within a year, and liabilities of UK£1.39m due beyond that. Offsetting this, it had UK£1.39m in cash and UK£6.58m in receivables that were due within 12 months. So it has liabilities totalling UK£7.53m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of UK£11.8m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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.

Better yet, Goldplat grew its EBIT by 137% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is Goldplat's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. Looking at the most recent three years, Goldplat recorded free cash flow of 39% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

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 137% year-on-year EBIT growth. So we are not troubled with Goldplat's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Goldplat .

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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