Gigaset (ETR:GGS) Seems To Be Using A Lot Of 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.' 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 Gigaset AG (ETR:GGS) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Gigaset

What Is Gigaset's Debt?

As you can see below, Gigaset had €15.1m of debt at March 2022, down from €17.5m a year prior. But on the other hand it also has €18.9m in cash, leading to a €3.85m net cash position.

A Look At Gigaset's Liabilities

According to the last reported balance sheet, Gigaset had liabilities of €73.4m due within 12 months, and liabilities of €96.9m due beyond 12 months. On the other hand, it had cash of €18.9m and €13.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €137.6m.

The deficiency here weighs heavily on the €38.1m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Gigaset would probably need a major re-capitalization if its creditors were to demand repayment. Given that Gigaset has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.

Notably, Gigaset made a loss at the EBIT level, last year, but improved that to positive EBIT of €1.4m in the last twelve months. 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 Gigaset 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Gigaset may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, Gigaset saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While Gigaset does have more liabilities than liquid assets, it also has net cash of €3.85m. Unfortunately, though, both its struggle level of total liabilities and its conversion of EBIT to free cash flow leave us concerned about Gigaset So despite the cash, we do think it carries some risks. 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 - Gigaset has 1 warning sign we think you should be aware of.

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.