Does Gatekeeper Systems (CVE:GSI) Have A Healthy Balance Sheet?

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 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. We can see that Gatekeeper Systems Inc. (CVE:GSI) does use debt in its business. But is this debt a concern to shareholders?

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 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.

Our analysis indicates that GSI is potentially overvalued!

How Much Debt Does Gatekeeper Systems Carry?

As you can see below, at the end of May 2022, Gatekeeper Systems had CA$2.66m of debt, up from none a year ago. Click the image for more detail. However, it does have CA$2.68m in cash offsetting this, leading to net cash of CA$12.1k.

A Look At Gatekeeper Systems' Liabilities

Zooming in on the latest balance sheet data, we can see that Gatekeeper Systems had liabilities of CA$6.26m due within 12 months and liabilities of CA$688.3k due beyond that. Offsetting these obligations, it had cash of CA$2.68m as well as receivables valued at CA$3.26m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$1.02m.

Of course, Gatekeeper Systems has a market capitalization of CA$19.7m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Gatekeeper Systems also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Gatekeeper Systems's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Gatekeeper Systems made a loss at the EBIT level, and saw its revenue drop to CA$15m, which is a fall of 23%. To be frank that doesn't bode well.

So How Risky Is Gatekeeper Systems?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Gatekeeper Systems had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CA$4.6m and booked a CA$295k accounting loss. With only CA$12.1k 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. For instance, we've identified 1 warning sign for Gatekeeper Systems that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.