Health Check: How Prudently Does Golden Land Berhad (KLSE:GLBHD) Use Debt?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Golden Land Berhad (KLSE:GLBHD) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Golden Land Berhad

What Is Golden Land Berhad's Debt?

As you can see below, Golden Land Berhad had RM180.4m of debt at December 2022, down from RM202.0m a year prior. However, it does have RM38.5m in cash offsetting this, leading to net debt of about RM141.8m.

How Healthy Is Golden Land Berhad's Balance Sheet?

The latest balance sheet data shows that Golden Land Berhad had liabilities of RM96.3m due within a year, and liabilities of RM130.5m falling due after that. Offsetting these obligations, it had cash of RM38.5m as well as receivables valued at RM26.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM162.0m.

This deficit casts a shadow over the RM51.5m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Golden Land Berhad would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Golden Land Berhad 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.

In the last year Golden Land Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 9.3%, to RM83m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Golden Land Berhad produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping RM17m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it lost RM28m in just last twelve months, and it doesn't have much by way of liquid assets. So while it's not wise to assume the company will fail, we do think it's risky. 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. We've identified 3 warning signs with Golden Land Berhad (at least 2 which are significant) , and understanding them should be part of your investment process.

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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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.