These 4 Measures Indicate That Golden Pharos Berhad (KLSE:GPHAROS) Is Using Debt Reasonably Well

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

When Is Debt A Problem?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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, at the end of December 2021, Golden Pharos Berhad had RM12.5m of debt, up from RM11.0m a year ago. Click the image for more detail. But it also has RM17.6m in cash to offset that, meaning it has RM5.08m net cash.

A Look At Golden Pharos Berhad's Liabilities

According to the last reported balance sheet, Golden Pharos Berhad had liabilities of RM19.7m due within 12 months, and liabilities of RM16.3m due beyond 12 months. Offsetting this, it had RM17.6m in cash and RM17.4m in receivables that were due within 12 months. So it has liabilities totalling RM948.0k more than its cash and near-term receivables, combined.

Given Golden Pharos Berhad has a market capitalization of RM46.4m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Golden Pharos Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, Golden Pharos Berhad made a loss at the EBIT level, last year, but improved that to positive EBIT of RM3.0m in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is Golden Pharos Berhad's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Golden Pharos Berhad has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, Golden Pharos Berhad actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

We could understand if investors are concerned about Golden Pharos Berhad's liabilities, but we can be reassured by the fact it has has net cash of RM5.08m. The cherry on top was that in converted 171% of that EBIT to free cash flow, bringing in RM5.1m. So we don't think Golden Pharos Berhad's use of debt is risky. 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. Case in point: We've spotted 2 warning signs for Golden Pharos Berhad you should be aware of.

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. 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.