Is Gibus (BIT:GBUS) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, Gibus S.p.A. (BIT:GBUS) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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 Gibus

What Is Gibus's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Gibus had debt of €10.5m, up from €3.20m in one year. But on the other hand it also has €18.2m in cash, leading to a €7.62m net cash position.

A Look At Gibus' Liabilities

We can see from the most recent balance sheet that Gibus had liabilities of €17.5m falling due within a year, and liabilities of €7.02m due beyond that. Offsetting this, it had €18.2m in cash and €8.80m in receivables that were due within 12 months. So it actually has €2.44m more liquid assets than total liabilities.

This surplus suggests that Gibus has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Gibus has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Gibus has boosted its EBIT by 85%, thus reducing the spectre of future debt repayments. 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 Gibus can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Gibus has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Gibus recorded free cash flow worth 56% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Gibus has net cash of €7.62m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 85% over the last year. So is Gibus's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Gibus you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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