Is GRC International Group (LON:GRC) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, GRC International Group plc (LON:GRC) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for GRC International Group

What Is GRC International Group's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2023 GRC International Group had debt of UK£1.47m, up from UK£778.0k in one year. Net debt is about the same, since the it doesn't have much cash.

How Strong Is GRC International Group's Balance Sheet?

We can see from the most recent balance sheet that GRC International Group had liabilities of UK£7.10m falling due within a year, and liabilities of UK£555.0k due beyond that. On the other hand, it had cash of UK£27.0k and UK£1.51m worth of receivables due within a year. So its liabilities total UK£6.12m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the UK£4.04m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, GRC International Group would likely require a major re-capitalisation if it had to pay its creditors today. 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 GRC International 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 GRC International Group wasn't profitable at an EBIT level, but managed to grow its revenue by 2.7%, to UK£15m. 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 GRC International Group produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable UK£1.6m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of UK£461k over the last twelve months. So suffice it to say we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that GRC International Group is showing 2 warning signs in our investment analysis , you should know about...

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.