Here's Why Grand Banks Yachts (SGX:G50) 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. 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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Net Debt?

As you can see below, Grand Banks Yachts had S$4.32m of debt at December 2023, down from S$5.57m a year prior. However, it does have S$44.2m in cash offsetting this, leading to net cash of S$39.9m.

A Look At Grand Banks Yachts' Liabilities

Zooming in on the latest balance sheet data, we can see that Grand Banks Yachts had liabilities of S$59.9m due within 12 months and liabilities of S$4.78m due beyond that. Offsetting this, it had S$44.2m in cash and S$26.0m in receivables that were due within 12 months. So it actually has S$5.50m 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. Succinctly put, Grand Banks Yachts boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Grand Banks Yachts grew its EBIT by 156% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Grand Banks Yachts may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last two years, Grand Banks Yachts reported free cash flow worth 18% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Grand Banks Yachts has S$39.9m in net cash and a decent-looking balance sheet. And we liked the look of last year's 156% year-on-year EBIT growth. So we don't think Grand Banks Yachts's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with Grand Banks Yachts (including 1 which makes us a bit uncomfortable) .

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.