Golden Pharos Berhad (KLSE:GPHAROS) Has A Rock Solid Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 note that Golden Pharos Berhad (KLSE:GPHAROS) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Golden Pharos Berhad

What Is Golden Pharos Berhad's Debt?

As you can see below, Golden Pharos Berhad had RM9.95m of debt at December 2022, down from RM11.8m a year prior. However, it does have RM22.5m in cash offsetting this, leading to net cash of RM12.5m.

How Strong Is Golden Pharos Berhad's Balance Sheet?

The latest balance sheet data shows that Golden Pharos Berhad had liabilities of RM18.0m due within a year, and liabilities of RM15.4m falling due after that. Offsetting these obligations, it had cash of RM22.5m as well as receivables valued at RM18.7m due within 12 months. So it can boast RM7.71m more liquid assets than total liabilities.

This excess liquidity suggests that Golden Pharos Berhad is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Golden Pharos Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Golden Pharos Berhad grew its EBIT by 2,520% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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 Pharos Berhad 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Golden Pharos Berhad 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. During the last two years, Golden Pharos Berhad generated free cash flow amounting to a very robust 81% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Golden Pharos Berhad has RM12.5m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of RM8.8m, being 81% of its EBIT. When it comes to Golden Pharos Berhad's debt, we sufficiently relaxed that our mind turns to the jacuzzi. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Golden Pharos Berhad (1 makes us a bit uncomfortable) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.