Is GFT Technologies (ETR:GFT) 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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that GFT Technologies SE (ETR:GFT) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for GFT Technologies

What Is GFT Technologies's Debt?

The image below, which you can click on for greater detail, shows that GFT Technologies had debt of €59.1m at the end of September 2022, a reduction from €82.9m over a year. However, its balance sheet shows it holds €66.5m in cash, so it actually has €7.35m net cash.

A Look At GFT Technologies' Liabilities

We can see from the most recent balance sheet that GFT Technologies had liabilities of €187.3m falling due within a year, and liabilities of €107.1m due beyond that. Offsetting these obligations, it had cash of €66.5m as well as receivables valued at €180.4m due within 12 months. So its liabilities total €47.6m more than the combination of its cash and short-term receivables.

Since publicly traded GFT Technologies shares are worth a total of €1.11b, it seems unlikely that this level of liabilities would be a major threat. 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, GFT Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, GFT Technologies grew its EBIT by 33% over the last twelve months, and that growth will make it easier to handle its debt. 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 GFT Technologies'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While GFT Technologies has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, GFT Technologies actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that GFT Technologies has €7.35m in net cash. The cherry on top was that in converted 104% of that EBIT to free cash flow, bringing in €37m. So we don't think GFT Technologies's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in GFT Technologies, you may well want to click here to check an interactive graph of its earnings per share history.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.