Warren Buffett famously said, '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. Importantly, GomSpace Group AB (publ) (STO:GOMX) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for GomSpace Group
How Much Debt Does GomSpace Group Carry?
The image below, which you can click on for greater detail, shows that GomSpace Group had debt of kr27.5m at the end of September 2020, a reduction from kr44.1m over a year. But it also has kr153.8m in cash to offset that, meaning it has kr126.3m net cash.
How Healthy Is GomSpace Group's Balance Sheet?
According to the last reported balance sheet, GomSpace Group had liabilities of kr114.5m due within 12 months, and liabilities of kr49.6m due beyond 12 months. On the other hand, it had cash of kr153.8m and kr43.8m worth of receivables due within a year. So it can boast kr33.5m more liquid assets than total liabilities.
This short term liquidity is a sign that GomSpace Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, GomSpace Group boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine GomSpace Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, GomSpace Group reported revenue of kr161m, which is a gain of 16%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
So How Risky Is GomSpace Group?
While GomSpace Group lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow kr8.1m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. Take risks, for example - GomSpace Group has 2 warning signs we think you should be aware of.
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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About OM:GOMX
GomSpace Group
Through its subsidiaries, designs, develops, integrates, and manufactures nanosatellites for the academic, government, and commercial markets.
Excellent balance sheet very low.
