Is Gulf Island Fabrication (NASDAQ:GIFI) Using Debt In A Risky Way?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Gulf Island Fabrication, Inc. (NASDAQ:GIFI) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. 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 Gulf Island Fabrication

How Much Debt Does Gulf Island Fabrication Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Gulf Island Fabrication had debt of US$9.46m, up from none in one year. But it also has US$63.8m in cash to offset that, meaning it has US$54.3m net cash.

How Healthy Is Gulf Island Fabrication's Balance Sheet?

The latest balance sheet data shows that Gulf Island Fabrication had liabilities of US$112.4m due within a year, and liabilities of US$8.51m falling due after that. On the other hand, it had cash of US$63.8m and US$96.8m worth of receivables due within a year. So it can boast US$39.6m more liquid assets than total liabilities.

This luscious liquidity implies that Gulf Island Fabrication's balance sheet is sturdy like a giant sequoia tree. 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 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.

In the last year Gulf Island Fabrication had a loss before interest and tax, and actually shrunk its revenue by 4.0%, to US$273m. That's not what we would hope to see.

So How Risky Is Gulf Island Fabrication?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Gulf Island Fabrication had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$20m of cash and made a loss of US$46m. But the saving grace is the US$54.3m on the balance sheet. That means it could keep spending at its current rate for more than two years. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Gulf Island Fabrication (of which 1 is significant!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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