Is Gaon Group (TLV:GAGR) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Gaon Group Ltd. (TLV:GAGR) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Gaon Group

How Much Debt Does Gaon Group Carry?

As you can see below, Gaon Group had ₪345.3m of debt at September 2023, down from ₪388.3m a year prior. On the flip side, it has ₪57.3m in cash leading to net debt of about ₪288.0m.

How Strong Is Gaon Group's Balance Sheet?

According to the last reported balance sheet, Gaon Group had liabilities of ₪419.0m due within 12 months, and liabilities of ₪142.3m due beyond 12 months. On the other hand, it had cash of ₪57.3m and ₪232.5m worth of receivables due within a year. So its liabilities total ₪271.6m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the ₪143.1m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Gaon Group would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Gaon Group'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.

In the last year Gaon Group's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

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 ₪828k. 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. It's fair to say the loss of ₪24m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Gaon Group (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.