Here's Why GB Group (LON:GBG) Can Afford Some Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, GB Group plc (LON:GBG) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for GB Group

How Much Debt Does GB Group Carry?

The image below, which you can click on for greater detail, shows that GB Group had debt of UK£123.0m at the end of September 2023, a reduction from UK£147.4m over a year. However, it also had UK£19.2m in cash, and so its net debt is UK£103.8m.

How Strong Is GB Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that GB Group had liabilities of UK£91.8m due within 12 months and liabilities of UK£156.6m due beyond that. Offsetting these obligations, it had cash of UK£19.2m as well as receivables valued at UK£55.0m due within 12 months. So its liabilities total UK£174.2m more than the combination of its cash and short-term receivables.

GB Group has a market capitalization of UK£721.1m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if GB Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, GB Group reported revenue of UK£277m, which is a gain of 3.8%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months GB Group produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping UK£108m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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£174m. So in short it's a really risky stock. For riskier companies like GB Group I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.