Does G.P. Global Power (TLV:GPGB) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 G.P. Global Power Ltd (TLV:GPGB) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

Check out our latest analysis for G.P. Global Power

What Is G.P. Global Power's Debt?

As you can see below, at the end of December 2020, G.P. Global Power had ₪208.9m of debt, up from ₪156.9m a year ago. Click the image for more detail. On the flip side, it has ₪77.7m in cash leading to net debt of about ₪131.2m.

How Strong Is G.P. Global Power's Balance Sheet?

The latest balance sheet data shows that G.P. Global Power had liabilities of ₪76.1m due within a year, and liabilities of ₪181.7m falling due after that. On the other hand, it had cash of ₪77.7m and ₪739.0k worth of receivables due within a year. So it has liabilities totalling ₪179.4m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of ₪181.7m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Weak interest cover of 0.34 times and a disturbingly high net debt to EBITDA ratio of 22.3 hit our confidence in G.P. Global Power like a one-two punch to the gut. This means we'd consider it to have a heavy debt load. Even worse, G.P. Global Power saw its EBIT tank 69% over the last 12 months. If earnings continue to follow that trajectory, paying off that debt load will be harder than convincing us to run a marathon in the rain. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since G.P. Global Power will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the last two years, G.P. Global Power saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

On the face of it, G.P. Global Power's conversion of EBIT to free cash flow left us tentative about the stock, and its EBIT growth rate was no more enticing than the one empty restaurant on the busiest night of the year. And even its net debt to EBITDA fails to inspire much confidence. We should also note that Electric Utilities industry companies like G.P. Global Power commonly do use debt without problems. After considering the datapoints discussed, we think G.P. Global Power has too much debt. While some investors love that sort of risky play, it's certainly not our cup of tea. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for G.P. Global Power (1 shouldn't be ignored) you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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