Does GR Engineering Services (ASX:GNG) Have A Healthy Balance Sheet?

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.' 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. As with many other companies GR Engineering Services Limited (ASX:GNG) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for GR Engineering Services

How Much Debt Does GR Engineering Services Carry?

As you can see below, at the end of June 2020, GR Engineering Services had AU$3.40m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has AU$37.5m in cash, leading to a AU$34.1m net cash position.

How Strong Is GR Engineering Services's Balance Sheet?

The latest balance sheet data shows that GR Engineering Services had liabilities of AU$60.1m due within a year, and liabilities of AU$3.19m falling due after that. On the other hand, it had cash of AU$37.5m and AU$38.9m worth of receivables due within a year. So it can boast AU$13.1m more liquid assets than total liabilities.

This short term liquidity is a sign that GR Engineering Services could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that GR Engineering Services has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine GR Engineering Services's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, GR Engineering Services reported revenue of AU$226m, which is a gain of 23%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is GR Engineering Services?

Although GR Engineering Services had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of AU$10m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We think its revenue growth of 23% is a good sign. There's no doubt fast top line growth can cure all manner of ills, for a stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for GR Engineering Services that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. 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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