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. We can see that Gusbourne PLC (LON:GUS) does use debt in its business. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Gusbourne’s Debt?
As you can see below, Gusbourne had UK£5.71m of debt, at June 2019, which is about the same as the year before. You can click the chart for greater detail. However, it also had UK£481.0k in cash, and so its net debt is UK£5.23m.
A Look At Gusbourne’s Liabilities
Zooming in on the latest balance sheet data, we can see that Gusbourne had liabilities of UK£2.00m due within 12 months and liabilities of UK£6.35m due beyond that. Offsetting this, it had UK£481.0k in cash and UK£731.0k in receivables that were due within 12 months. So it has liabilities totalling UK£7.14m more than its cash and near-term receivables, combined.
This deficit isn’t so bad because Gusbourne is worth UK£23.7m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. 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. Shareholders probably have their fingers crossed that it can grow its way to profits.
Despite the top line growth, Gusbourne still had negative earnings before interest and tax (EBIT), over the last year. To be specific the EBIT loss came in at UK£1.7m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year’s loss of UK£2.0m. So we do think this stock is quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We’ve identified 5 warning signs with Gusbourne (at least 1 which is potentially serious) , and understanding them should be part of your investment process.
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. Thank you for reading.