When The Gym Group plc (LON:GYM) reported its results to December 2020 its auditors, Ernst & Young LLP could not be sure that it would be able to continue as a going concern in the next year. Thus we can say that, based on the results to that date, the company should raise capital or otherwise raise cash, without much delay.
Given its situation, it may not be in a good position to raise capital on favorable terms. So shareholders should absolutely be taking a close look at how risky the balance sheet is. The biggest concern we would have is the company's debt, since its lenders might force the company into administration if it cannot repay them.
Check out our latest analysis for Gym Group
How Much Debt Does Gym Group Carry?
As you can see below, Gym Group had UK£49.2m of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. However, it also had UK£3.74m in cash, and so its net debt is UK£45.4m.
How Strong Is Gym Group's Balance Sheet?
We can see from the most recent balance sheet that Gym Group had liabilities of UK£43.1m falling due within a year, and liabilities of UK£334.9m due beyond that. Offsetting these obligations, it had cash of UK£3.74m as well as receivables valued at UK£1.58m due within 12 months. So it has liabilities totalling UK£372.7m more than its cash and near-term receivables, combined.
This deficit is considerable relative to its market capitalization of UK£427.8m, so it does suggest shareholders should keep an eye on Gym Group's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Gym Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Gym Group had a loss before interest and tax, and actually shrunk its revenue by 47%, to UK£80m. That makes us nervous, to say the least.
Caveat Emptor
While Gym Group'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 UK£33m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through UK£14m of cash over the last year. So suffice it to say we do consider the stock to be risky. We're too cautious to want to invest in a company after an auditor has expressed doubts about its ability to continue as a going concern. That's because we find it more comfortable to invest in companies that always keep the balance sheet reasonably strong. 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. Case in point: We've spotted 1 warning sign for Gym Group you should be aware of.
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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About LSE:GYM
Gym Group
Operates a network of gym facilities under the Gym Group brand name in the United Kingdom.
Reasonable growth potential with mediocre balance sheet.
