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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Global Fashion Group S.A. (ETR:GFG) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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

How Much Debt Does Global Fashion Group Carry?

As you can see below, Global Fashion Group had €269.0m of debt at December 2022, down from €364.0m a year prior. But on the other hand it also has €550.0m in cash, leading to a €281.0m net cash position.

A Look At Global Fashion Group's Liabilities

We can see from the most recent balance sheet that Global Fashion Group had liabilities of €386.6m falling due within a year, and liabilities of €308.5m due beyond that. Offsetting these obligations, it had cash of €550.0m as well as receivables valued at €68.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €76.2m.

While this might seem like a lot, it is not so bad since Global Fashion Group has a market capitalization of €133.9m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Global Fashion Group 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 ultimately the future profitability of the business will decide if Global Fashion Group can strengthen its balance sheet over time. 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 6.4%, to €1.1b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Global Fashion Group?

Although Global Fashion Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of €25m. 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. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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 2 warning signs for Global Fashion Group that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.