Goodtech (OB:GOD) Has A Pretty Healthy Balance Sheet

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.' 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 can see that Goodtech ASA (OB:GOD) does use debt in its business. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Goodtech

What Is Goodtech's Net Debt?

The chart below, which you can click on for greater detail, shows that Goodtech had kr37.1m in debt in December 2020; about the same as the year before. However, its balance sheet shows it holds kr108.1m in cash, so it actually has kr71.0m net cash.

How Strong Is Goodtech's Balance Sheet?

According to the last reported balance sheet, Goodtech had liabilities of kr185.6m due within 12 months, and liabilities of kr43.2m due beyond 12 months. Offsetting this, it had kr108.1m in cash and kr105.6m in receivables that were due within 12 months. So its liabilities total kr15.0m more than the combination of its cash and short-term receivables.

Since publicly traded Goodtech shares are worth a total of kr336.2m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Goodtech also has more cash than debt, so we're pretty confident it can manage its debt safely.

Notably, Goodtech's EBIT launched higher than Elon Musk, gaining a whopping 112% on last year. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Goodtech 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Goodtech may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Goodtech saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

We could understand if investors are concerned about Goodtech's liabilities, but we can be reassured by the fact it has has net cash of kr71.0m. And we liked the look of last year's 112% year-on-year EBIT growth. So we don't have any problem with Goodtech's use of debt. 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. For instance, we've identified 2 warning signs for Goodtech that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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