GSE Systems (NASDAQ:GVP) Is Making Moderate Use Of Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that GSE Systems, Inc. (NASDAQ:GVP) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 GSE Systems

What Is GSE Systems's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2022 GSE Systems had debt of US$3.94m, up from US$2.07m in one year. However, because it has a cash reserve of US$3.66m, its net debt is less, at about US$283.0k.

A Look At GSE Systems' Liabilities

We can see from the most recent balance sheet that GSE Systems had liabilities of US$15.2m falling due within a year, and liabilities of US$1.56m due beyond that. Offsetting this, it had US$3.66m in cash and US$11.6m in receivables that were due within 12 months. So its liabilities total US$1.50m more than the combination of its cash and short-term receivables.

Since publicly traded GSE Systems shares are worth a total of US$21.3m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Carrying virtually no net debt, GSE Systems has a very light debt load indeed. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if GSE Systems can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, GSE Systems made a loss at the EBIT level, and saw its revenue drop to US$51m, which is a fall of 5.9%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months GSE Systems produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping US$7.7m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of US$16m into a profit. So to be blunt we do think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 4 warning signs we've spotted with GSE Systems .

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.