Would Gama Aviation (LON:GMAA) Be Better Off With Less 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. As with many other companies Gama Aviation Plc (LON:GMAA) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out the opportunities and risks within the GB Airlines industry.

How Much Debt Does Gama Aviation Carry?

The image below, which you can click on for greater detail, shows that Gama Aviation had debt of US$55.1m at the end of June 2022, a reduction from US$62.7m over a year. However, it also had US$11.4m in cash, and so its net debt is US$43.7m.

How Healthy Is Gama Aviation's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Gama Aviation had liabilities of US$117.4m due within 12 months and liabilities of US$37.8m due beyond that. Offsetting these obligations, it had cash of US$11.4m as well as receivables valued at US$59.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$83.9m.

Since publicly traded Gama Aviation shares are worth a total of US$4.02b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Carrying virtually no net debt, Gama Aviation has a very light debt load indeed. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Gama Aviation's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Gama Aviation reported revenue of US$268m, which is a gain of 37%, 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.

Caveat Emptor

While we can certainly appreciate Gama Aviation's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost US$1.0m 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 US$3.8m. So to be blunt we do think it is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Gama Aviation (at least 1 which is a bit unpleasant) , and understanding them should be part of your investment process.

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.