Is Golden Pharos Berhad (KLSE:GPHAROS) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Golden Pharos Berhad (KLSE:GPHAROS) does carry debt. But the more important question is: how much risk is that debt creating?

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. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Golden Pharos Berhad

What Is Golden Pharos Berhad's Net Debt?

As you can see below, Golden Pharos Berhad had RM12.8m of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds RM13.1m in cash, so it actually has RM323.0k net cash.

How Healthy Is Golden Pharos Berhad's Balance Sheet?

The latest balance sheet data shows that Golden Pharos Berhad had liabilities of RM19.7m due within a year, and liabilities of RM17.2m falling due after that. On the other hand, it had cash of RM13.1m and RM18.2m worth of receivables due within a year. So it has liabilities totalling RM5.61m more than its cash and near-term receivables, combined.

Given Golden Pharos Berhad has a market capitalization of RM33.5m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Golden Pharos Berhad also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. 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 had a loss before interest and tax, and actually shrunk its revenue by 29%, to RM44m. To be frank that doesn't bode well.

So How Risky Is Golden Pharos Berhad?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Golden Pharos Berhad had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of RM5.2m and booked a RM9.6m accounting loss. Given it only has net cash of RM323.0k, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Golden Pharos Berhad (at least 2 which are potentially serious) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. 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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