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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Gigas Hosting, S.A. (BME:GIGA) does have debt on its balance sheet. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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, 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.
See 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 2024 Gigas Hosting had €58.0m of debt, an increase on €42.8m, over one year. However, it does have €15.0m in cash offsetting this, leading to net debt of about €43.1m.
How Healthy Is Gigas Hosting's Balance Sheet?
The latest balance sheet data shows that Gigas Hosting had liabilities of €46.5m due within a year, and liabilities of €89.2m falling due after that. Offsetting these obligations, it had cash of €15.0m as well as receivables valued at €21.4m due within 12 months. So it has liabilities totalling €99.3m more than its cash and near-term receivables, combined.
When you consider that this deficiency exceeds the company's €91.6m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. 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 Gigas Hosting 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, Gigas Hosting reported revenue of €74m, which is a gain of 10.0%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.
Caveat Emptor
Importantly, Gigas Hosting had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at €632k. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through €2.2m in negative free cash flow over the last year. That means it's on the risky side of things. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Gigas Hosting you should be aware of.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.
About BME:GIGA
Imperfect balance sheet and overvalued.
