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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies GR Engineering Services Limited (ASX:GNG) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for GR Engineering Services

How Much Debt Does GR Engineering Services Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 GR Engineering Services had AU$5.09m of debt, an increase on none, over one year. However, it does have AU$52.8m in cash offsetting this, leading to net cash of AU$47.7m.

How Healthy Is GR Engineering Services' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that GR Engineering Services had liabilities of AU$82.7m due within 12 months and liabilities of AU$3.99m due beyond that. Offsetting this, it had AU$52.8m in cash and AU$53.3m in receivables that were due within 12 months. So it actually has AU$19.4m 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. Succinctly put, GR Engineering Services boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, GR Engineering Services turned things around in the last 12 months, delivering and EBIT of AU$18m. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While GR Engineering Services has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, GR Engineering Services actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that GR Engineering Services has net cash of AU$47.7m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of AU$35m, being 195% of its EBIT. So is GR Engineering Services's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs 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.

If you’re looking to trade GR Engineering Services, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.