Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Gaon Group Ltd. (TLV:GAGR) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Gaon Group
How Much Debt Does Gaon Group Carry?
The image below, which you can click on for greater detail, shows that at June 2023 Gaon Group had debt of ₪330.1m, up from ₪306.7m in one year. However, it does have ₪38.3m in cash offsetting this, leading to net debt of about ₪291.8m.
A Look At Gaon Group's Liabilities
We can see from the most recent balance sheet that Gaon Group had liabilities of ₪371.3m falling due within a year, and liabilities of ₪149.1m due beyond that. Offsetting this, it had ₪38.3m in cash and ₪220.7m in receivables that were due within 12 months. So its liabilities total ₪261.4m more than the combination of its cash and short-term receivables.
The deficiency here weighs heavily on the ₪138.2m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Gaon Group would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is Gaon Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Gaon Group wasn't profitable at an EBIT level, but managed to grow its revenue by 12%, to ₪693m. 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 Gaon Group produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at ₪1.1m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of ₪22m. And until that time we think this is a risky stock. 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. For example Gaon Group has 4 warning signs (and 2 which are significant) we think you should know about.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.
About TASE:GAGR
Slight with mediocre balance sheet.
