Is Gatekeeper Systems (CVE:GSI) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Gatekeeper Systems Inc. (CVE:GSI) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Gatekeeper Systems

What Is Gatekeeper Systems's Debt?

The image below, which you can click on for greater detail, shows that at February 2022 Gatekeeper Systems had debt of CA$1.97m, up from CA$10.0 in one year. However, its balance sheet shows it holds CA$3.02m in cash, so it actually has CA$1.05m net cash.

How Healthy Is Gatekeeper Systems' Balance Sheet?

We can see from the most recent balance sheet that Gatekeeper Systems had liabilities of CA$4.24m falling due within a year, and liabilities of CA$607.3k due beyond that. Offsetting these obligations, it had cash of CA$3.02m as well as receivables valued at CA$2.35m due within 12 months. So it actually has CA$533.2k more liquid assets than total liabilities.

Having regard to Gatekeeper Systems' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CA$29.7m company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Gatekeeper Systems 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 you can't view debt in total isolation; since Gatekeeper Systems will need earnings to service that debt. 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 32%. To be frank that doesn't bode well.

So How Risky Is Gatekeeper Systems?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Gatekeeper Systems had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CA$2.9m of cash and made a loss of CA$218k. With only CA$1.05m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Gatekeeper Systems you should know about.

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. 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.