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.’ When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Globus Maritime Limited (NASDAQ:GLBS) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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.

How Much Debt Does Globus Maritime Carry?

You can click the graphic below for the historical numbers, but it shows that Globus Maritime had US$30.7m of debt in March 2021, down from US$37.4m, one year before. But it also has US$51.4m in cash to offset that, meaning it has US$20.7m net cash.

How Healthy Is Globus Maritime’s Balance Sheet?

According to the last reported balance sheet, Globus Maritime had liabilities of US$12.4m due within 12 months, and liabilities of US$25.4m due beyond 12 months. On the other hand, it had cash of US$51.4m and US$98.0k worth of receivables due within a year. So it can boast US$13.7m more liquid assets than total liabilities.

This excess liquidity suggests that Globus Maritime is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Globus Maritime has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Globus Maritime can strengthen its balance sheet over time.

Over 12 months, Globus Maritime saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

So How Risky Is Globus Maritime?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Globus Maritime had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$27m and booked a US$9.1m accounting loss. With only US$20.7m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn’t produce free cash flow regularly.