Auditors Are Concerned About GCM Resources (LON:GCM)

Unfortunately for shareholders, when GCM Resources Plc (LON:GCM) reported results for the period to June 2022, its auditors, PKF Littlejohn LLP, expressed uncertainty about whether it can continue as a going concern. 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 it is suddenly extremely important to consider whether the company is taking too much risk on its balance sheet. The big consideration is whether it can repay its debt, since in the worst case scenario, creditors could force the company to bankruptcy.

Check out our latest analysis for GCM Resources

What Is GCM Resources's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2022 GCM Resources had debt of UK£4.68m, up from UK£4.20m in one year. However, it does have UK£961.0k in cash offsetting this, leading to net debt of about UK£3.72m.

How Healthy Is GCM Resources' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that GCM Resources had liabilities of UK£1.40m due within 12 months and liabilities of UK£4.68m due beyond that. Offsetting this, it had UK£961.0k in cash and UK£7.0k in receivables that were due within 12 months. So it has liabilities totalling UK£5.11m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since GCM Resources has a market capitalization of UK£8.75m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 GCM Resources 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.

Since GCM Resources doesn't have significant operating revenue, shareholders must hope it'll sell some fossil fuels, before it runs out of money.

Caveat Emptor

Importantly, GCM Resources had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping UK£1.2m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled UK£1.4m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very 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. For example GCM Resources has 5 warning signs (and 3 which make us uncomfortable) we think you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.