Is GomSpace Group (STO:GOMX) 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 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, 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 Dangerous?

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. 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, 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 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 kr19.4m at the end of December 2020, a reduction from kr23.8m over a year. But on the other hand it also has kr135.5m in cash, leading to a kr116.1m net cash position.

How Strong Is GomSpace Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that GomSpace Group had liabilities of kr102.0m due within 12 months and liabilities of kr53.6m due beyond that. Offsetting this, it had kr135.5m in cash and kr50.5m in receivables that were due within 12 months. So it can boast kr30.4m 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. Simply put, the fact that GomSpace Group has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if GomSpace Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year GomSpace Group wasn't profitable at an EBIT level, but managed to grow its revenue by 43%, to kr195m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is GomSpace Group?

Although GomSpace Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of kr19m. 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. Keeping in mind its 43% revenue growth over the last year, we think there's a decent chance the company is on track. There's no doubt fast top line growth can cure all manner of ills, for a stock. 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. Case in point: We've spotted 1 warning sign for GomSpace Group 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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