Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said that “volatility is far from synonymous with risk.” It is only natural to consider a company’s balance sheet when examining how risky it is, as debt often occurs when a company collapses. As with many other companies Grand Parade Investments Limited JSE: GPL) uses debt. But the real question is whether this debt makes the business risky.
When is guilt dangerous?
Debt is a tool to help businesses grow, but if a business is unable to pay off its lenders, it is at their mercy. When things get really bad, the lenders can take charge of the business. A more common (but still expensive) situation, however, is that a company must dilute shareholders at a cheap stock price to get debt under control. By replacing dilution, debt can be an extremely good tool for companies that need capital to invest in growth at high returns. The first step in considering a company’s debt levels is to consider the cash and debt together.
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How Much Debt Do the Grand Parade Investments Carry?
You can click on the image below for the historical figures, but it shows that Grand Parade Investments had a debt of R329.1 million as of December 2020, an increase of R296.4 million over a year. However, because it has a cash reserve of R142.8 million, its net debt is lower, about R186.3 million.
How healthy is Grand Parade Investments’ balance sheet?
We can see from the most recent balance sheet that Grand Parade Investments had liabilities of R315.1 million due within one year, and liabilities of R637.0 million thereafter. To offset these liabilities, it had cash at hand of R142.8 million and receivables worth R92.4 million within 12 months. Thus, it has liabilities totaling R716.9 million more than its cash and receivables combined.
This deficit is significant in relation to the market capitalization of R1.18b, so it suggests shareholders should keep an eye on Grand Parade Investments’ use of debt. This suggests that shareholders would be heavily diluted if the company had to strengthen its balance sheet quickly. When analyzing debt levels, balance sheet is the obvious place to start. But it’s Grand Parade Investments’ earnings that will affect how the balance sheet holds up going forward. So if you want to learn more about the earnings it might be worth checking it out this graph of its long-term profit development
In the past year, Grand Parade Investments had a loss before interest and taxes and sales even shrank by 15% to R1.3b. That’s not what we hope to see.
While Grand Parade Investments’ declining earnings are about as heartwarming as a wet blanket, earnings before interest and tax (EBIT) loss are probably even less attractive. Indeed it lost R105m on EBIT level. If we look at that and recall the liabilities on the balance sheet, in proportion to cash, it seems unwise to us that the company is in any debt. Frankly, we think the balance is far from match fit, although it can be improved over time. We would feel better if it were his trailing twelve-month loss of R122m sales into profit. So we think this stock is pretty risky. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks are in the balance sheet – far from it. For example, we have discovered 2 warning signs for Grand Parade Investments (1 is significant!) You should be aware of before investing here.
After all that, if you’re more interested in a fast-growing company with a rock-solid balance sheet, check it out our list of net cash growth stocks without delay.
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This article from Simply Wall St is general in nature. It is not a recommendation to buy or sell stock and does not take into account your objectives or your financial situation. We strive to provide you with long-term focused analysis driven by fundamental data. Note that our analysis may not take into account the latest price sensitive company announcements or quality material. Simply Wall St has no exposure to said stocks.
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