Is Global Fashion Group (ETR:GFG) Using Debt Sensibly?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 note that Global Fashion Group S.A. (ETR:GFG) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Global Fashion Group

What Is Global Fashion Group's Debt?

The image below, which you can click on for greater detail, shows that at June 2021 Global Fashion Group had debt of €338.3m, up from €10.5m in one year. However, it does have €702.9m in cash offsetting this, leading to net cash of €364.6m.

How Healthy Is Global Fashion Group's Balance Sheet?

According to the last reported balance sheet, Global Fashion Group had liabilities of €489.0m due within 12 months, and liabilities of €429.3m due beyond 12 months. Offsetting these obligations, it had cash of €702.9m as well as receivables valued at €47.7m due within 12 months. So its liabilities total €167.7m more than the combination of its cash and short-term receivables.

Of course, Global Fashion Group has a market capitalization of €2.29b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Global Fashion Group 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 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're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Global Fashion Group wasn't profitable at an EBIT level, but managed to grow its revenue by 7.4%, to €1.5b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Global Fashion Group?

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 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 €48m and booked a €94m accounting loss. However, it has net cash of €364.6m, so it has a bit of time before it will need more capital. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Global Fashion Group 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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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.
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