Does Gobarto (WSE:GOB) Have A Healthy Balance Sheet?

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 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 Gobarto S.A. (WSE:GOB) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Gobarto

How Much Debt Does Gobarto Carry?

The image below, which you can click on for greater detail, shows that Gobarto had debt of zł209.8m at the end of March 2021, a reduction from zł236.1m over a year. On the flip side, it has zł29.5m in cash leading to net debt of about zł180.3m.

A Look At Gobarto's Liabilities

We can see from the most recent balance sheet that Gobarto had liabilities of zł392.6m falling due within a year, and liabilities of zł163.1m due beyond that. Offsetting this, it had zł29.5m in cash and zł186.8m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł339.4m.

This deficit casts a shadow over the zł161.2m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Gobarto 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 you can't view debt in total isolation; since Gobarto will need earnings to service that debt. 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, Gobarto made a loss at the EBIT level, and saw its revenue drop to zł1.8b, which is a fall of 30%. That makes us nervous, to say the least.

Caveat Emptor

While Gobarto's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable zł25m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident 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 zł38m. In the meantime, we consider the stock to be risky. 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. Be aware that Gobarto is showing 3 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

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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