Is Catapult Group International (ASX:CAT) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Catapult Group International Limited (ASX:CAT) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out 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. But it also has US$24.6m in cash to offset that, meaning it has US$22.9m net cash.

A Look At Catapult Group International's Liabilities

The latest balance sheet data shows that Catapult Group International had liabilities of US$37.3m due within a year, and liabilities of US$8.94m falling due after that. On the other hand, it had cash of US$24.6m and US$14.6m worth of receivables due within a year. So it has liabilities totalling US$7.04m more than its cash and near-term receivables, combined.

Given Catapult Group International has a market capitalization of US$253.0m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Catapult Group International 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 it is future earnings, more than anything, that will determine Catapult Group International's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

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 although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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 example, we've discovered 1 warning sign for Catapult Group International that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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