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.’ 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. We note that Globus Maritime Limited (NASDAQ:GLBS) does have debt on its balance sheet. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company’s use of debt, we first look at cash and debt together.
How Much Debt Does Globus Maritime Carry?
As you can see below, Globus Maritime had US$30.1m of debt at March 2021, down from US$37.4m a year prior. However, it does have US$51.8m in cash offsetting this, leading to net cash of US$21.7m.
How Strong Is Globus Maritime’s Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Globus Maritime had liabilities of US$13.1m due within 12 months and liabilities of US$37.7m due beyond that. On the other hand, it had cash of US$51.8m and US$153.0k worth of receivables due within a year. So it actually has US$1.19m more liquid assets than total liabilities.
This surplus suggests that Globus Maritime has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Globus Maritime boasts net cash, so it’s fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Globus Maritime’s earnings that will influence how the balance sheet holds up in the future.
In the last year Globus Maritime’s revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.
So How Risky Is Globus Maritime?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Globus Maritime had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$25m of cash and made a loss of US$9.1m. Given it only has net cash of US$21.7m, the company may need to raise more capital if it doesn’t reach break-even 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. 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.