Is GO2 People (ASX:GO2) Using Debt Sensibly?

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.' 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. We can see that The GO2 People Limited (ASX:GO2) does use debt in its business. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for GO2 People

How Much Debt Does GO2 People Carry?

As you can see below, GO2 People had AU$3.08m of debt, at June 2021, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds AU$6.38m in cash, so it actually has AU$3.29m net cash.

How Strong Is GO2 People's Balance Sheet?

We can see from the most recent balance sheet that GO2 People had liabilities of AU$17.9m falling due within a year, and liabilities of AU$7.74m due beyond that. On the other hand, it had cash of AU$6.38m and AU$8.41m worth of receivables due within a year. So its liabilities total AU$10.8m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of AU$14.1m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, GO2 People also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since GO2 People will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, GO2 People reported revenue of AU$30m, which is a gain of 2.1%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is GO2 People?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months GO2 People lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through AU$324k of cash and made a loss of AU$2.2m. With only AU$3.29m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. To that end, you should learn about the 4 warning signs we've spotted with GO2 People (including 2 which are a bit concerning) .

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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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