Is Golden Pharos Berhad (KLSE:GPHAROS) Using Too Much 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.' 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. We note that Golden Pharos Berhad (KLSE:GPHAROS) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its 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 RM12.1m of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has RM13.1m in cash, leading to a RM1.06m net cash position.

A Look At Golden Pharos Berhad's Liabilities

According to the last reported balance sheet, Golden Pharos Berhad had liabilities of RM15.7m due within 12 months, and liabilities of RM17.4m due beyond 12 months. On the other hand, it had cash of RM13.1m and RM15.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM4.31m.

Since publicly traded Golden Pharos Berhad shares are worth a total of RM32.4m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Golden Pharos Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Golden Pharos Berhad had a loss before interest and tax, and actually shrunk its revenue by 18%, to RM47m. That's not what we would hope to see.

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 in the last year Golden Pharos Berhad had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of RM8.0m and booked a RM6.8m accounting loss. Given it only has net cash of RM1.06m, 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. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Golden Pharos Berhad 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. 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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