Is Golden Land Berhad (KLSE:GLBHD) A Risky Investment?

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.' 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. As with many other companies Golden Land Berhad (KLSE:GLBHD) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

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What Is Golden Land Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Golden Land Berhad had RM206.3m of debt, an increase on RM184.6m, over one year. However, it also had RM69.5m in cash, and so its net debt is RM136.8m.

A Look At Golden Land Berhad's Liabilities

The latest balance sheet data shows that Golden Land Berhad had liabilities of RM152.8m due within a year, and liabilities of RM133.4m falling due after that. Offsetting these obligations, it had cash of RM69.5m as well as receivables valued at RM52.5m due within 12 months. So its liabilities total RM164.3m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the RM64.4m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Golden Land Berhad would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is Golden Land Berhad's earnings that will influence how the balance sheet holds up in the future. 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 Land Berhad made a loss at the EBIT level, and saw its revenue drop to RM59m, which is a fall of 29%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Golden Land Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping RM21m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through RM22m in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. 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. We've identified 3 warning signs with Golden Land Berhad (at least 2 which shouldn't be ignored) , and understanding them should be part of your investment process.

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.