Gateley (Holdings) (LON:GTLY) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, '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 Gateley (Holdings) Plc (LON:GTLY) 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. 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.

See our latest analysis for Gateley (Holdings)

What Is Gateley (Holdings)'s Debt?

The image below, which you can click on for greater detail, shows that Gateley (Holdings) had debt of UK£3.77m at the end of October 2020, a reduction from UK£4.55m over a year. But it also has UK£13.1m in cash to offset that, meaning it has UK£9.30m net cash.

How Healthy Is Gateley (Holdings)'s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Gateley (Holdings) had liabilities of UK£26.5m due within 12 months and liabilities of UK£32.2m due beyond that. Offsetting this, it had UK£13.1m in cash and UK£45.4m in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Gateley (Holdings)'s size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the UK£197.0m company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Gateley (Holdings) boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Gateley (Holdings) saw its EBIT drop by 8.7% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. 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 Gateley (Holdings) can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Gateley (Holdings) may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Gateley (Holdings) recorded free cash flow worth a fulsome 85% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Gateley (Holdings) has UK£9.30m in net cash. And it impressed us with free cash flow of UK£18m, being 85% of its EBIT. So we don't think Gateley (Holdings)'s use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider risks, for instance. Every company has them, and we've spotted 1 warning sign for Gateley (Holdings) you should know about.

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. 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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