Is Gulf Island Fabrication (NASDAQ:GIFI) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. 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.

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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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Gulf Island Fabrication Carry?

The image below, which you can click on for greater detail, shows that Gulf Island Fabrication had debt of US$19.0m at the end of December 2024, a reduction from US$20.0m over a year. However, its balance sheet shows it holds US$66.1m in cash, so it actually has US$47.1m net cash.

A Look At Gulf Island Fabrication's Liabilities

According to the last reported balance sheet, Gulf Island Fabrication had liabilities of US$21.4m due within 12 months, and liabilities of US$18.7m due beyond 12 months. Offsetting these obligations, it had cash of US$66.1m as well as receivables valued at US$31.1m due within 12 months. So it can boast US$57.1m 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.

See our latest analysis for Gulf Island Fabrication

It was also good to see that despite losing money on the EBIT line last year, Gulf Island Fabrication turned things around in the last 12 months, delivering and EBIT of US$9.2m. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Gulf Island Fabrication will need earnings to service that debt. 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. Gulf Island Fabrication 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. Happily for any shareholders, Gulf Island Fabrication actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Gulf Island Fabrication has net cash of US$47.1m, as well as more liquid assets than liabilities. The cherry on top was that in converted 141% of that EBIT to free cash flow, bringing in US$13m. So is Gulf Island Fabrication's debt a risk? It doesn't seem so to us. 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. For example, we've discovered 2 warning signs for Gulf Island Fabrication that you should be aware of before investing here.

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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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.