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 Gattaca plc (LON:GATC) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Gattaca Carry?
You can click the graphic below for the historical numbers, but it shows that Gattaca had UK£4.34m of debt in January 2021, down from UK£22.4m, one year before. But on the other hand it also has UK£27.1m in cash, leading to a UK£22.7m net cash position.
How Healthy Is Gattaca's Balance Sheet?
According to the last reported balance sheet, Gattaca had liabilities of UK£47.6m due within 12 months, and liabilities of UK£6.71m due beyond 12 months. Offsetting these obligations, it had cash of UK£27.1m as well as receivables valued at UK£43.9m due within 12 months. So it actually has UK£16.7m more liquid assets than total liabilities.
This surplus liquidity suggests that Gattaca's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Gattaca has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Gattaca'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.
Over 12 months, Gattaca made a loss at the EBIT level, and saw its revenue drop to UK£448m, which is a fall of 27%. That makes us nervous, to say the least.
So How Risky Is Gattaca?
Although Gattaca had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of UK£27m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. Case in point: We've spotted 3 warning signs for Gattaca you should be aware of, and 1 of them doesn't sit too well with us.
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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