Is GSE Systems (NASDAQ:GVP) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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, GSE Systems, Inc. (NASDAQ:GVP) does carry debt. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for GSE Systems

What Is GSE Systems's Debt?

The image below, which you can click on for greater detail, shows that GSE Systems had debt of US$3.79m at the end of March 2022, a reduction from US$12.6m over a year. But on the other hand it also has US$5.45m in cash, leading to a US$1.66m net cash position.

A Look At GSE Systems' Liabilities

The latest balance sheet data shows that GSE Systems had liabilities of US$16.6m due within a year, and liabilities of US$3.74m falling due after that. On the other hand, it had cash of US$5.45m and US$10.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$4.42m.

Since publicly traded GSE Systems shares are worth a total of US$23.7m, 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. Despite its noteworthy liabilities, GSE Systems boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is GSE Systems's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year GSE Systems wasn't profitable at an EBIT level, but managed to grow its revenue by 2.5%, to US$54m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is GSE Systems?

While GSE Systems lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of US$9.4m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with GSE Systems (including 1 which is significant) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.