Does Gulf Island Fabrication (NASDAQ:GIFI) 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.' 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 Gulf Island Fabrication, Inc. (NASDAQ:GIFI) makes use of debt. But the real question is whether this debt is making the company risky.

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. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Gulf Island Fabrication

What Is Gulf Island Fabrication's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Gulf Island Fabrication had US$20.0m of debt, an increase on US$100.0k, over one year. However, it does have US$61.6m in cash offsetting this, leading to net cash of US$41.6m.

How Strong Is Gulf Island Fabrication's Balance Sheet?

We can see from the most recent balance sheet that Gulf Island Fabrication had liabilities of US$27.1m falling due within a year, and liabilities of US$19.5m due beyond that. On the other hand, it had cash of US$61.6m and US$35.7m worth of receivables due within a year. So it can boast US$50.7m more liquid assets than total liabilities.

This surplus strongly suggests that Gulf Island Fabrication has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Gulf Island Fabrication has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Gulf Island Fabrication can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Gulf Island Fabrication made a loss at the EBIT level, and saw its revenue drop to US$134m, which is a fall of 25%. To be frank that doesn't bode well.

So How Risky Is Gulf Island Fabrication?

Although Gulf Island Fabrication had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$14m. 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. The next few years will be important as the business matures. 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. For example, we've discovered 1 warning sign for Gulf Island Fabrication that you should be aware of before investing here.

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.