Is Gulf Island Fabrication (NASDAQ:GIFI) Using Too Much Debt?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Gulf Island Fabrication, Inc. (NASDAQ:GIFI) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 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 December 2023 Gulf Island Fabrication had debt of US$20.0m, up from none in one year. But it also has US$46.4m in cash to offset that, meaning it has US$26.4m net cash.

A Look At Gulf Island Fabrication's Liabilities

The latest balance sheet data shows that Gulf Island Fabrication had liabilities of US$29.8m due within a year, and liabilities of US$19.6m falling due after that. Offsetting these obligations, it had cash of US$46.4m as well as receivables valued at US$39.0m due within 12 months. So it actually has US$36.0m more liquid assets than total liabilities.

This luscious liquidity implies that Gulf Island Fabrication's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Gulf Island Fabrication boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. 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 reported revenue of US$151m, which is a gain of 6.1%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

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$4.3m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Gulf Island Fabrication insider transactions.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.