Does Grand Banks Yachts (SGX:G50) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Grand Banks Yachts Limited (SGX:G50) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Grand Banks Yachts

What Is Grand Banks Yachts's Debt?

As you can see below, Grand Banks Yachts had S$4.93m of debt at December 2021, down from S$5.30m a year prior. However, its balance sheet shows it holds S$45.4m in cash, so it actually has S$40.5m net cash.

A Look At Grand Banks Yachts' Liabilities

The latest balance sheet data shows that Grand Banks Yachts had liabilities of S$46.3m due within a year, and liabilities of S$3.82m falling due after that. Offsetting these obligations, it had cash of S$45.4m as well as receivables valued at S$7.99m due within 12 months. So it can boast S$3.28m more liquid assets than total liabilities.

This short term liquidity is a sign that Grand Banks Yachts could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Grand Banks Yachts has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Grand Banks Yachts will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Grand Banks Yachts made a loss at the EBIT level, and saw its revenue drop to S$76m, which is a fall of 32%. To be frank that doesn't bode well.

So How Risky Is Grand Banks Yachts?

Although Grand Banks Yachts had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of S$25m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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 2 warning signs for Grand Banks Yachts (1 shouldn't be ignored) 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.