Is Gobarto (WSE:GOB) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, Gobarto S.A. (WSE:GOB) does carry debt. But the real question is whether this debt is making the company risky.

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, 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Gobarto

How Much Debt Does Gobarto Carry?

The chart below, which you can click on for greater detail, shows that Gobarto had zł224.2m in debt in September 2021; about the same as the year before. On the flip side, it has zł25.8m in cash leading to net debt of about zł198.3m.

How Healthy Is Gobarto's Balance Sheet?

According to the last reported balance sheet, Gobarto had liabilities of zł396.9m due within 12 months, and liabilities of zł170.7m due beyond 12 months. On the other hand, it had cash of zł25.8m and zł193.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł348.5m.

This deficit casts a shadow over the zł125.1m 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. When analysing debt levels, the balance sheet is the obvious place to start. 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 zł1.9b, which is a fall of 9.6%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Gobarto produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping zł30m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it vaporized zł48m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is risky, like walking through a dirty dog park with a mask on. 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. For example Gobarto has 3 warning signs (and 2 which can't be ignored) 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.