Is Gentrack Group (NZSE:GTK) Using Debt In A Risky Way?

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.' 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 Gentrack Group Limited (NZSE:GTK) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Gentrack Group

How Much Debt Does Gentrack Group Carry?

You can click the graphic below for the historical numbers, but it shows that Gentrack Group had NZ$2.54m of debt in September 2020, down from NZ$4.45m, one year before. However, it does have NZ$19.3m in cash offsetting this, leading to net cash of NZ$16.8m.

How Strong Is Gentrack Group's Balance Sheet?

According to the last reported balance sheet, Gentrack Group had liabilities of NZ$30.2m due within 12 months, and liabilities of NZ$17.9m due beyond 12 months. Offsetting this, it had NZ$19.3m in cash and NZ$19.0m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NZ$9.75m.

Given Gentrack Group has a market capitalization of NZ$148.0m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Gentrack Group boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Gentrack Group 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.

In the last year Gentrack Group had a loss before interest and tax, and actually shrunk its revenue by 10.0%, to NZ$101m. We would much prefer see growth.

So How Risky Is Gentrack Group?

While Gentrack Group lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow NZ$21m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example - Gentrack Group has 1 warning sign we think you should be aware of.

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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