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. When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Gusbourne PLC (LON:GUS) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company’s debt levels is to consider its cash and debt together.
What Is Gusbourne’s Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 Gusbourne had UK£5.71m of debt, an increase on UK£5.8, over one year. On the flip side, it has UK£481.0k in cash leading to net debt of about UK£5.23m.
How Strong Is Gusbourne’s Balance Sheet?
We can see from the most recent balance sheet that Gusbourne had liabilities of UK£2.00m falling due within a year, and liabilities of UK£6.35m due beyond that. On the other hand, it had cash of UK£481.0k and UK£731.0k worth of receivables due within a year. So its liabilities total UK£7.14m more than the combination of its cash and short-term receivables.
This deficit isn’t so bad because Gusbourne is worth UK£35.6m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. 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 ultimately the future profitability of the business will decide if Gusbourne 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.
Over 12 months, Gusbourne reported revenue of UK£1.5m, which is a gain of 48%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
Despite the top line growth, Gusbourne still had negative earnings before interest and tax (EBIT), over the last year. Indeed, it lost UK£1.7m at the EBIT level. 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£3.3m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. For example, we’ve discovered 6 warning signs for Gusbourne (of which 2 are major) which any shareholder or potential investor 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.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned.
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