We Think GB Group (LON:GBG) Has A Fair Chunk Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 GB Group plc (LON:GBG) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 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. 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 GB Group

What Is GB Group's Net Debt?

As you can see below, GB Group had UK£126.4m of debt, at March 2023, which is about the same as the year before. You can click the chart for greater detail. However, it also had UK£21.6m in cash, and so its net debt is UK£104.9m.

How Strong Is GB Group's Balance Sheet?

According to the last reported balance sheet, GB Group had liabilities of UK£96.8m due within 12 months, and liabilities of UK£164.2m due beyond 12 months. On the other hand, it had cash of UK£21.6m and UK£55.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£183.8m.

This deficit isn't so bad because GB Group is worth UK£656.5m, 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 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.

In the last year GB Group wasn't profitable at an EBIT level, but managed to grow its revenue by 15%, to UK£279m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, GB Group had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable UK£114m 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. For example, we would not want to see a repeat of last year's loss of UK£120m. So in short it's a really risky stock. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting GB Group insider transactions.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.