Is Gigaset (ETR:GGS) Using Debt Sensibly?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that Gigaset AG (ETR:GGS) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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.

See our latest analysis for Gigaset

How Much Debt Does Gigaset Carry?

The chart below, which you can click on for greater detail, shows that Gigaset had €16.5m in debt in December 2020; about the same as the year before. But it also has €42.0m in cash to offset that, meaning it has €25.6m net cash.

How Strong Is Gigaset's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Gigaset had liabilities of €87.4m due within 12 months and liabilities of €115.6m due beyond that. On the other hand, it had cash of €42.0m and €39.5m worth of receivables due within a year. So its liabilities total €121.5m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the €39.7m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Gigaset would likely require a major re-capitalisation if it had to pay its creditors today. Gigaset boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total. There's no doubt that we learn most about debt from the balance sheet. 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.

Over 12 months, Gigaset made a loss at the EBIT level, and saw its revenue drop to €224m, which is a fall of 16%. We would much prefer see growth.

So How Risky Is Gigaset?

While Gigaset lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow €8.1m. 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. We're not impressed by its revenue growth, so until we see some positive sustainable EBIT, we consider the stock to be high risk. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Gigaset is showing 1 warning sign in our investment analysis , you should know about...

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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