Does Golden Pharos Berhad (KLSE:GPHAROS) 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.' 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. Importantly, Golden Pharos Berhad (KLSE:GPHAROS) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Golden Pharos Berhad

What Is Golden Pharos Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Golden Pharos Berhad had RM13.2m of debt in June 2021, down from RM13.8m, one year before. However, it also had RM9.26m in cash, and so its net debt is RM3.91m.

A Look At Golden Pharos Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that Golden Pharos Berhad had liabilities of RM18.9m due within 12 months and liabilities of RM17.3m due beyond that. Offsetting these obligations, it had cash of RM9.26m as well as receivables valued at RM15.3m due within 12 months. So it has liabilities totalling RM11.6m more than its cash and near-term receivables, combined.

Golden Pharos Berhad has a market capitalization of RM57.6m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Golden Pharos 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 Pharos Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 36%, to RM53m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though Golden Pharos Berhad managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost a very considerable RM8.3m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through RM3.3m of cash over the last year. So suffice it to say we consider the stock very risky. 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. For example, we've discovered 3 warning signs for Golden Pharos Berhad (1 is potentially serious!) that you should be aware of before investing here.

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.

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.

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