Is GC Rieber Shipping (OB:RISH) 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, GC Rieber Shipping ASA (OB:RISH) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for GC Rieber Shipping

How Much Debt Does GC Rieber Shipping Carry?

You can click the graphic below for the historical numbers, but it shows that GC Rieber Shipping had kr896.1m of debt in September 2020, down from kr1.16b, one year before. On the flip side, it has kr251.4m in cash leading to net debt of about kr644.7m.

A Look At GC Rieber Shipping's Liabilities

The latest balance sheet data shows that GC Rieber Shipping had liabilities of kr59.3m due within a year, and liabilities of kr891.7m falling due after that. Offsetting these obligations, it had cash of kr251.4m as well as receivables valued at kr70.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr629.5m.

When you consider that this deficiency exceeds the company's kr542.0m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since GC Rieber Shipping 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.

In the last year GC Rieber Shipping had a loss before interest and tax, and actually shrunk its revenue by 7.1%, to kr212m. We would much prefer see growth.

Caveat Emptor

Importantly, GC Rieber Shipping had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost kr48m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of kr443m. And until that time we think this is a risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with GC Rieber Shipping , and understanding them should be part of your investment process.

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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