Is GCM Resources (LON:GCM) Weighed On By Its Debt Load?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies GCM Resources Plc (LON:GCM) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

View our latest analysis for GCM Resources

How Much Debt Does GCM Resources Carry?

The image below, which you can click on for greater detail, shows that at June 2024 GCM Resources had debt of UK£5.66m, up from UK£5.16m in one year. On the flip side, it has UK£1.66m in cash leading to net debt of about UK£4.00m.

How Healthy Is GCM Resources' Balance Sheet?

We can see from the most recent balance sheet that GCM Resources had liabilities of UK£1.40m falling due within a year, and liabilities of UK£5.66m due beyond that. Offsetting this, it had UK£1.66m in cash and UK£22.0k in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£5.38m.

When you consider that this deficiency exceeds the company's UK£4.70m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is GCM Resources's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Given its lack of meaningful operating revenue, GCM Resources shareholders no doubt hope it can fund itself until it can sell some combustibles.

Caveat Emptor

Over the last twelve months GCM Resources produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable UK£899k at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of UK£1.2m over the last twelve months. So suffice it to say we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for GCM Resources you should be aware of, and 3 of them shouldn't be ignored.

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.