Is Catapult Group International (ASX:CAT) A Risky Investment?

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 Catapult Group International Limited (ASX:CAT) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Catapult Group International

How Much Debt Does Catapult Group International Carry?

The image below, which you can click on for greater detail, shows that at December 2020 Catapult Group International had debt of US$1.74m, up from none in one year. However, its balance sheet shows it holds US$24.6m in cash, so it actually has US$22.9m net cash.

How Healthy Is Catapult Group International's Balance Sheet?

According to the last reported balance sheet, Catapult Group International had liabilities of US$37.3m due within 12 months, and liabilities of US$8.94m due beyond 12 months. Offsetting this, it had US$24.6m in cash and US$14.6m in receivables that were due within 12 months. So its liabilities total US$7.04m more than the combination of its cash and short-term receivables.

Of course, Catapult Group International has a market capitalization of US$328.5m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Catapult Group International boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Catapult Group International can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Catapult Group International wasn't profitable at an EBIT level, but managed to grow its revenue by 6.8%, to US$76m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Catapult Group International?

Although Catapult Group International had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$6.4m. 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. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Catapult Group International insider transactions.

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. 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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