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. We note that Global Oriental Berhad (KLSE:GOB) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. If things get really bad, the lenders can take control of the business. 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. 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.
Check out our latest analysis for Global Oriental Berhad
What Is Global Oriental Berhad's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Global Oriental Berhad had RM195.9m of debt in September 2020, down from RM212.6m, one year before. However, because it has a cash reserve of RM128.9m, its net debt is less, at about RM67.0m.
A Look At Global Oriental Berhad's Liabilities
Zooming in on the latest balance sheet data, we can see that Global Oriental Berhad had liabilities of RM444.6m due within 12 months and liabilities of RM290.4m due beyond that. Offsetting this, it had RM128.9m in cash and RM78.3m in receivables that were due within 12 months. So it has liabilities totalling RM527.8m more than its cash and near-term receivables, combined.
The deficiency here weighs heavily on the RM204.6m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Global Oriental Berhad would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is Global Oriental 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.
In the last year Global Oriental Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 65%, to RM309m. With any luck the company will be able to grow its way to profitability.
Caveat Emptor
While we can certainly appreciate Global Oriental Berhad's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Its EBIT loss was a whopping RM39m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely since it is low on liquid assets, and made a loss of RM36m in the last year. So while it's not wise to assume the company will fail, we do think it's risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Like risks, for instance. Every company has them, and we've spotted 3 warning signs for Global Oriental Berhad (of which 1 is significant!) you should know about.
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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About KLSE:GOB
Global Oriental Berhad
An investment holding company, engages in the development of properties primarily in Malaysia.
Good value with acceptable track record.
