Here's Why Grand Parade Investments (JSE:GPL) Can Afford Some Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Grand Parade Investments Limited (JSE:GPL) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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 Grand Parade Investments

How Much Debt Does Grand Parade Investments Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Grand Parade Investments had R329.1m of debt, an increase on R296.4m, over one year. However, because it has a cash reserve of R142.8m, its net debt is less, at about R186.3m.

How Healthy Is Grand Parade Investments' Balance Sheet?

We can see from the most recent balance sheet that Grand Parade Investments had liabilities of R315.1m falling due within a year, and liabilities of R637.0m due beyond that. Offsetting these obligations, it had cash of R142.8m as well as receivables valued at R92.4m due within 12 months. So it has liabilities totalling R716.9m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of R1.18b, so it does suggest shareholders should keep an eye on Grand Parade Investments' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But it is Grand Parade Investments's earnings that will influence how the balance sheet holds up in the future. 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 Grand Parade Investments had a loss before interest and tax, and actually shrunk its revenue by 15%, to R1.3b. That's not what we would hope to see.

Caveat Emptor

While Grand Parade Investments's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost R105m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of R122m into a profit. So we do think this stock is quite risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Grand Parade Investments (1 is significant!) that you should be aware of before investing here.

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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