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. We note that Grindrod Shipping Holdings Ltd. (NASDAQ:GRIN) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Grindrod Shipping Holdings Carry?
As you can see below, at the end of December 2020, Grindrod Shipping Holdings had US$278.4m of debt, up from US$165.2m a year ago. Click the image for more detail. However, it also had US$41.3m in cash, and so its net debt is US$237.2m.
How Strong Is Grindrod Shipping Holdings' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Grindrod Shipping Holdings had liabilities of US$117.9m due within 12 months and liabilities of US$250.2m due beyond that. Offsetting these obligations, it had cash of US$41.3m as well as receivables valued at US$28.4m due within 12 months. So it has liabilities totalling US$298.5m more than its cash and near-term receivables, combined.
The deficiency here weighs heavily on the US$140.5m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Grindrod Shipping Holdings would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Grindrod Shipping Holdings's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Grindrod Shipping Holdings had a loss before interest and tax, and actually shrunk its revenue by 16%, to US$279m. We would much prefer see growth.
While Grindrod Shipping Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at US$9.6m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of US$41m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. 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. Be aware that Grindrod Shipping Holdings is showing 2 warning signs in our investment analysis , 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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