We Think Goodtech (OB:GOD) Is Taking Some Risk With Its Debt

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Goodtech ASA (OB:GOD) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Goodtech

What Is Goodtech's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2023 Goodtech had debt of kr55.3m, up from kr43.9m in one year. However, it does have kr85.6m in cash offsetting this, leading to net cash of kr30.3m.

A Look At Goodtech's Liabilities

According to the last reported balance sheet, Goodtech had liabilities of kr265.2m due within 12 months, and liabilities of kr44.5m due beyond 12 months. On the other hand, it had cash of kr85.6m and kr159.2m worth of receivables due within a year. So it has liabilities totalling kr64.9m more than its cash and near-term receivables, combined.

Goodtech has a market capitalization of kr286.1m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Goodtech boasts net cash, so it's fair to say it does not have a heavy debt load!

We also note that Goodtech improved its EBIT from a last year's loss to a positive kr8.8m. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Goodtech can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Over the last year, Goodtech saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

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 kr30.3m. So although we see some areas for improvement, we're not too worried about Goodtech's balance sheet. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Goodtech you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.