Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Gusbourne PLC (LON:GUS) makes use of debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Gusbourne's Debt?
The image below, which you can click on for greater detail, shows that at June 2020 Gusbourne had debt of UK£10.0m, up from UK£5.71m in one year. However, it does have UK£473.0k in cash offsetting this, leading to net debt of about UK£9.54m.
How Healthy Is Gusbourne's Balance Sheet?
We can see from the most recent balance sheet that Gusbourne had liabilities of UK£1.26m falling due within a year, and liabilities of UK£12.0m due beyond that. Offsetting this, it had UK£473.0k in cash and UK£988.0k in receivables that were due within 12 months. So it has liabilities totalling UK£11.8m more than its cash and near-term receivables, combined.
This deficit isn't so bad because Gusbourne is worth UK£26.7m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Gusbourne's earnings that will influence how the balance sheet holds up in the future. 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.
In the last year Gusbourne wasn't profitable at an EBIT level, but managed to grow its revenue by 23%, to UK£1.9m. Shareholders probably have their fingers crossed that it can grow its way to profits.
Even though Gusbourne managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost UK£2.3m 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. Another cause for caution is that is bled UK£3.8m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for Gusbourne (2 are potentially serious) you should be aware of.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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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