Health Check: How Prudently Does Global Fashion Group (ETR:GFG) Use Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We can see that Global Fashion Group S.A. (ETR:GFG) does use debt in its business. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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. 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.

See our latest analysis for Global Fashion Group

What Is Global Fashion Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 Global Fashion Group had €364.0m of debt, an increase on €10.2m, over one year. However, it does have €634.5m in cash offsetting this, leading to net cash of €270.5m.

How Healthy Is Global Fashion Group's Balance Sheet?

According to the last reported balance sheet, Global Fashion Group had liabilities of €523.0m due within 12 months, and liabilities of €448.4m due beyond 12 months. Offsetting this, it had €634.5m in cash and €91.8m in receivables that were due within 12 months. So it has liabilities totalling €245.1m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of €401.7m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, Global Fashion Group boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Global Fashion Group'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.

In the last year Global Fashion Group wasn't profitable at an EBIT level, but managed to grow its revenue by 15%, to €1.6b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Global Fashion Group?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Global Fashion Group had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of €108m and booked a €124m accounting loss. However, it has net cash of €270.5m, so it has a bit of time before it will need more capital. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Global Fashion Group is showing 3 warning signs in our investment analysis , 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.