Is Grupo Empresarial San José (BME:GSJ) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Grupo Empresarial San José, S.A. (BME:GSJ) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Grupo Empresarial San José

What Is Grupo Empresarial San José's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Grupo Empresarial San José had €154.1m of debt in September 2020, down from €273.3m, one year before. However, it does have €302.8m in cash offsetting this, leading to net cash of €148.7m.

How Strong Is Grupo Empresarial San José's Balance Sheet?

The latest balance sheet data shows that Grupo Empresarial San José had liabilities of €631.1m due within a year, and liabilities of €180.8m falling due after that. Offsetting this, it had €302.8m in cash and €387.5m in receivables that were due within 12 months. So it has liabilities totalling €121.5m more than its cash and near-term receivables, combined.

Grupo Empresarial San José has a market capitalization of €292.6m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Grupo Empresarial San José 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 Grupo Empresarial San José's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Grupo Empresarial San José wasn't profitable at an EBIT level, but managed to grow its revenue by 2.4%, to €959m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Grupo Empresarial San José?

While Grupo Empresarial San José lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of €154m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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 Grupo Empresarial San José is showing 3 warning signs in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. 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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