Does Gofore Oyj (HEL:GOFORE) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Gofore Oyj (HEL:GOFORE) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Gofore Oyj

What Is Gofore Oyj's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Gofore Oyj had debt of €9.50m, up from €6.36m in one year. But it also has €21.9m in cash to offset that, meaning it has €12.4m net cash.

How Healthy Is Gofore Oyj's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Gofore Oyj had liabilities of €27.5m due within 12 months and liabilities of €14.7m due beyond that. Offsetting this, it had €21.9m in cash and €12.1m in receivables that were due within 12 months. So its liabilities total €8.26m more than the combination of its cash and short-term receivables.

Since publicly traded Gofore Oyj shares are worth a total of €313.0m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Gofore Oyj boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Gofore Oyj has boosted its EBIT by 36%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Gofore Oyj'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Gofore Oyj has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Gofore Oyj actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

We could understand if investors are concerned about Gofore Oyj's liabilities, but we can be reassured by the fact it has has net cash of €12.4m. The cherry on top was that in converted 122% of that EBIT to free cash flow, bringing in €8.2m. So we don't think Gofore Oyj's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Gofore Oyj has 1 warning sign we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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