Here's Why Globalstar (NYSEMKT:GSAT) Can Afford Some Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. As with many other companies Globalstar, Inc. (NYSEMKT:GSAT) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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.

See our latest analysis for Globalstar

What Is Globalstar's Debt?

You can click the graphic below for the historical numbers, but it shows that Globalstar had US$373.9m of debt in September 2020, down from US$501.3m, one year before. However, because it has a cash reserve of US$19.5m, its net debt is less, at about US$354.4m.

How Strong Is Globalstar's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Globalstar had liabilities of US$107.2m due within 12 months and liabilities of US$356.8m due beyond that. Offsetting these obligations, it had cash of US$19.5m as well as receivables valued at US$21.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$423.1m.

This deficit isn't so bad because Globalstar is worth US$935.4m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 Globalstar can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Globalstar made a loss at the EBIT level, and saw its revenue drop to US$127m, which is a fall of 3.5%. We would much prefer see growth.

Caveat Emptor

Importantly, Globalstar had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$63m at the EBIT level. 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. For example, we would not want to see a repeat of last year's loss of US$126m. So we do think this stock is quite risky. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Globalstar (at least 1 which is significant) , and understanding them should be part of your investment process.

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. 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.
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