Is GomSpace Group (STO:GOMX) Using Debt Sensibly?

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. As with many other companies GomSpace Group AB (publ) (STO:GOMX) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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

Check out our latest analysis for GomSpace Group

What Is GomSpace Group's Net Debt?

The image below, which you can click on for greater detail, shows that GomSpace Group had debt of kr24.4m at the end of March 2022, a reduction from kr28.2m over a year. But it also has kr150.8m in cash to offset that, meaning it has kr126.4m net cash.

How Strong Is GomSpace Group's Balance Sheet?

The latest balance sheet data shows that GomSpace Group had liabilities of kr121.4m due within a year, and liabilities of kr57.5m falling due after that. Offsetting this, it had kr150.8m in cash and kr103.2m in receivables that were due within 12 months. So it actually has kr75.1m 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.

In the last year GomSpace Group wasn't profitable at an EBIT level, but managed to grow its revenue by 36%, to kr257m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is GomSpace Group?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months GomSpace Group lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through kr45m of cash and made a loss of kr11m. But at least it has kr126.4m on the balance sheet to spend on growth, near-term. With very solid revenue growth in the last year, GomSpace Group may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. We've identified 3 warning signs with GomSpace Group , and understanding them should be part of your investment process.

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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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.