Gaumont (EPA:GAM) Is Making Moderate Use Of Debt

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 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. Importantly, Gaumont SA (EPA:GAM) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Gaumont

What Is Gaumont's Net Debt?

As you can see below, at the end of December 2020, Gaumont had €123.9m of debt, up from €116.1m a year ago. Click the image for more detail. However, it does have €114.9m in cash offsetting this, leading to net debt of about €9.02m.

How Strong Is Gaumont's Balance Sheet?

We can see from the most recent balance sheet that Gaumont had liabilities of €197.4m falling due within a year, and liabilities of €94.5m due beyond that. On the other hand, it had cash of €114.9m and €138.0m worth of receivables due within a year. So it has liabilities totalling €38.9m more than its cash and near-term receivables, combined.

Given Gaumont has a market capitalization of €342.7m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Gaumont will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Gaumont made a loss at the EBIT level, and saw its revenue drop to €154m, which is a fall of 27%. That makes us nervous, to say the least.

Caveat Emptor

While Gaumont's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost €8.4m at the EBIT level. 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 €25m of cash over the last year. So in short it's a really risky stock. 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 instance, we've identified 2 warning signs for Gaumont (1 is concerning) you should be aware of.

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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