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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Golden Pharos Berhad (KLSE:GPHAROS) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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

How Much Debt Does Golden Pharos Berhad Carry?

The image below, which you can click on for greater detail, shows that Golden Pharos Berhad had debt of RM12.2m at the end of March 2021, a reduction from RM13.2m over a year. On the flip side, it has RM10.7m in cash leading to net debt of about RM1.55m.

A Look At Golden Pharos Berhad's Liabilities

We can see from the most recent balance sheet that Golden Pharos Berhad had liabilities of RM16.5m falling due within a year, and liabilities of RM17.2m due beyond that. On the other hand, it had cash of RM10.7m and RM17.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM6.08m.

Of course, Golden Pharos Berhad has a market capitalization of RM64.6m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Golden Pharos Berhad reported revenue of RM54m, which is a gain of 13%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Golden Pharos Berhad had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost RM6.1m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through RM4.2m of cash over the last year. So in short it's a really risky stock. 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. For example Golden Pharos Berhad has 3 warning signs (and 1 which is a bit unpleasant) we think you should know about.

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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