Grand Banks Yachts (SGX:G50) Seems To Use Debt Quite Sensibly

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.' 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. As with many other companies Grand Banks Yachts Limited (SGX:G50) makes use of debt. But the more important question is: how much risk is that debt creating?

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. 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 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 Grand Banks Yachts

How Much Debt Does Grand Banks Yachts Carry?

As you can see below, Grand Banks Yachts had S$6.73m of debt at June 2020, down from S$16.0m a year prior. However, its balance sheet shows it holds S$10.7m in cash, so it actually has S$3.98m net cash.

How Strong Is Grand Banks Yachts's Balance Sheet?

We can see from the most recent balance sheet that Grand Banks Yachts had liabilities of S$27.3m falling due within a year, and liabilities of S$4.83m due beyond that. Offsetting these obligations, it had cash of S$10.7m as well as receivables valued at S$12.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by S$8.96m.

Given Grand Banks Yachts has a market capitalization of S$46.2m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Grand Banks Yachts boasts net cash, so it's fair to say it does not have a heavy debt load!

It is well worth noting that Grand Banks Yachts's EBIT shot up like bamboo after rain, gaining 46% in the last twelve months. That'll make it easier to manage its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Grand Banks Yachts's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Grand Banks Yachts 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. Considering the last three years, Grand Banks Yachts actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing up

Although Grand Banks Yachts's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of S$3.98m. And it impressed us with its EBIT growth of 46% over the last year. So we are not troubled with Grand Banks Yachts's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example - Grand Banks Yachts has 4 warning signs (and 1 which is a bit unpleasant) we think you should know about.

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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