Health Check: How Prudently Does Gigas Hosting (BME:GIGA) Use Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies Gigas Hosting, S.A. (BME:GIGA) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Gigas Hosting

What Is Gigas Hosting's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Gigas Hosting had €42.8m of debt, an increase on €32.5m, over one year. However, it also had €10.2m in cash, and so its net debt is €32.6m.

A Look At Gigas Hosting's Liabilities

Zooming in on the latest balance sheet data, we can see that Gigas Hosting had liabilities of €42.6m due within 12 months and liabilities of €75.7m due beyond that. Offsetting these obligations, it had cash of €10.2m as well as receivables valued at €16.9m due within 12 months. So its liabilities total €91.2m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of €94.6m, so it does suggest shareholders should keep an eye on Gigas Hosting's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Gigas Hosting'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.

In the last year Gigas Hosting wasn't profitable at an EBIT level, but managed to grow its revenue by 8.7%, to €67m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Gigas Hosting produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at €1.4m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through €2.7m of cash over the last year. So to be blunt we think it is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Gigas Hosting 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. 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.