Here's Why Goodtech (OB:GOD) Can Manage Its Debt Responsibly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Goodtech ASA (OB:GOD) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Goodtech

How Much Debt Does Goodtech Carry?

The image below, which you can click on for greater detail, shows that Goodtech had debt of kr26.7m at the end of September 2023, a reduction from kr37.0m over a year. But on the other hand it also has kr71.8m in cash, leading to a kr45.1m net cash position.

A Look At Goodtech's Liabilities

We can see from the most recent balance sheet that Goodtech had liabilities of kr222.2m falling due within a year, and liabilities of kr41.1m due beyond that. Offsetting this, it had kr71.8m in cash and kr142.3m in receivables that were due within 12 months. So its liabilities total kr49.2m more than the combination of its cash and short-term receivables.

Of course, Goodtech has a market capitalization of kr347.4m, so these liabilities are probably manageable. 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.

Pleasingly, Goodtech is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 545% gain in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Goodtech's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Goodtech 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. Happily for any shareholders, Goodtech actually produced more free cash flow than EBIT over the last two years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

Although Goodtech's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of kr45.1m. The cherry on top was that in converted 268% of that EBIT to free cash flow, bringing in kr20m. So we don't think Goodtech'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. For instance, we've identified 3 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. 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.