Is Gallant Venture (SGX:5IG) A Risky Investment?

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.' 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. Importantly, Gallant Venture Ltd. (SGX:5IG) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Gallant Venture

What Is Gallant Venture's Net Debt?

As you can see below, Gallant Venture had S$343.3m of debt at December 2020, down from S$3.27b a year prior. However, it does have S$106.8m in cash offsetting this, leading to net debt of about S$236.5m.

How Healthy Is Gallant Venture's Balance Sheet?

The latest balance sheet data shows that Gallant Venture had liabilities of S$496.8m due within a year, and liabilities of S$68.7m falling due after that. On the other hand, it had cash of S$106.8m and S$70.7m worth of receivables due within a year. So its liabilities total S$388.0m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Gallant Venture is worth S$748.6m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But it is Gallant Venture'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.

In the last year Gallant Venture had a loss before interest and tax, and actually shrunk its revenue by 93%, to S$138m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Gallant Venture's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at S$18m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through S$11m of cash over the last year. So suffice it to say we do consider the stock to be risky. 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. To that end, you should be aware of the 1 warning sign we've spotted with Gallant Venture .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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