These 4 Measures Indicate That Gateley (Holdings) (LON:GTLY) Is Using Debt Reasonably Well

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Gateley (Holdings) Plc (LON:GTLY) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, 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 at April 2024 Gateley (Holdings) had debt of UK£12.9m, up from UK£6.81m in one year. However, it does have UK£16.7m in cash offsetting this, leading to net cash of UK£3.77m.

A Look At Gateley (Holdings)'s Liabilities

The latest balance sheet data shows that Gateley (Holdings) had liabilities of UK£51.9m due within a year, and liabilities of UK£30.9m falling due after that. On the other hand, it had cash of UK£16.7m and UK£98.8m worth of receivables due within a year. So it can boast UK£32.7m more liquid assets than total liabilities.

It's good to see that Gateley (Holdings) has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Gateley (Holdings) has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, Gateley (Holdings)'s EBIT dived 19%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Gateley (Holdings)'s ability to maintain a healthy balance sheet going forward. 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. While Gateley (Holdings) 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. In the last three years, Gateley (Holdings)'s free cash flow amounted to 37% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Gateley (Holdings) has net cash of UK£3.77m, as well as more liquid assets than liabilities. So we are not troubled with Gateley (Holdings)'s debt use. 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. To that end, you should learn about the 4 warning signs we've spotted with Gateley (Holdings) (including 1 which doesn't sit too well with us) .

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. 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.